Date of this Version
Quarterly Journal of Economics
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.
This is a pre-copyedited, author-produced PDF of an article accepted for publication in the Quarterly Journal of Economics following peer review. The version of record is available online at: http://dx.doi.org/10.1162/003355302753399472.
Gross, D. B., & Souleles, N. S. (2002). Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence From Credit Card Data. Quarterly Journal of Economics, 117 (1), 149-185. http://dx.doi.org/10.1162/003355302753399472
Date Posted: 27 November 2017
This document has been peer reviewed.