Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data

David B. Gross and Nicholas S. Souleles

The Quarterly Journal of Economics, 2002, vol. 117, issue 1, 149-185

Abstract: This paper utilizes a unique data set of credit card accounts to analyze how people respond to credit supply. Increases in credit limits generate an immediate and significant rise in debt, counter to the Permanent-Income Hypothesis. The "MPC out of liquidity" is largest for people starting near their limit, consistent with binding liquidity constraints. However, the MPC is significant even for people starting well below their limit, consistent with precautionary models. Nonetheless, there are other results that conventional models cannot easily explain, for example, why so many people are borrowing on their credit cards, and simultaneously holding low yielding assets. The long-run elasticity of debt to the interest rate is approximately -1.3, less than half of which represents balance-shifting across cards.

Date: 2002
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