Credit Cards and the Great Recession: The Collapse of Teasers

Lukasz Drozd and Michal Kowalik
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Lukasz Drozd: Federal Reserve Bank of Philadelphia
Michal Kowalik: Federal Reserve Bank of Boston

No 1047, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We analyze the role of promotional "teaser" rates on credit card plans prior, during, and after the 2007-08 financial crisis. We show that promotional offers were ubiquitous prior to the crisis. They were typically chained by borrowers to, in effect, borrow for the long term on low promotional rates. We then show that promotional activity collapsed in mid 2008, which coincided with a massive deleveraging on credit card plans between 2008 and 2011. We build a new equilibrium theory that can relate these phenomenona, analytically characterize equilibrium contracts, and take it to the data. The key insight from our analysis is that a decline in the availability of promotional offerings introduced as an exogenous shock can account for deleveraging. Our model suggests this shock had a discernible impact on consumption demand after 2008, consistent with the narrative that the credit card market played a more direct role in the transmission of the 2008 financial turmoil to aggregate demand.

Date: 2019
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-pay
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1047

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