Séminaire

Credit Smoothing

Arna Olafsson (Copenhagen Business School)

1 octobre 2018, 12h30–14h00

Salle MF 323

Fédération des Banques Françaises Seminar

Résumé

Standard economic theory suggests that high-interest, unsecured, short-term borrowing, e.g., via credit cards, helps individuals smooth consumption in the event of transitory income shocks. This paper shows that—on average—individuals do not use such borrowing to smooth consumption when they experience a typical transitory income shock due to unemployment. Rather, it appears as if individuals smooth their debt balances. We first use detailed longitudinal information on debit and credit account transactions, balances, and limits from a financial aggregator in Iceland to document that unemployment does not induce a large borrowing response at the individual level. We then replicate this finding in a representative sample of U.S. credit card holders, instrumenting local changes in employment using a Bartik (1991)-style instrument. This absence of a borrowing response occurs even when credit supply is ample and liquidity constraints do not bind (as captured by credit limits). This finding is difficult to reconcile with theories of consumption smoothing, which predict a strictly countercyclical demand for credit. On the contrary, credit rather demand appears to be procyclical, which may deepen business cycle fluctuations.

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