Finance Papers

Document Type

Journal Article

Date of this Version

2002

Publication Source

Quarterly Journal of Economics

Volume

117

Issue

1

Start Page

149

Last Page

185

DOI

10.1162/003355302753399472

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.

Copyright/Permission Statement

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.

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Date Posted: 27 November 2017

This document has been peer reviewed.