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

Wharton FIC Working Paper No. 00-04

53 Pages Posted: 26 Apr 2000

See all articles by David B. Gross

David B. Gross

Compass Lexecon

Nicholas S. Souleles

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2000


This paper utilizes a unique new dataset of credit card accounts to analyze how people respond to changes in credit supply. The data consist of a panel of thousands of individual credit card accounts from several different card issuers, with associated credit bureau data. We estimate both marginal propensities to consume (MPCs) out of liquidity and interest-rate elasticities. We also evaluate the ability of different models of consumption to rationalize our results, distinguishing the Permanent-Income Hypothesis (PIH), liquidity constraints, precautionary saving, and behavioral models.

We find that increases in credit limits generate an immediate and significant rise in debt, counter to the PIH. The average "MPC out of liquidity" (dDebt/dLimit) ranges between 10%-14%. The MPC is much larger for people starting near their limits, consistent with binding liquidity constraints. However, the MPC is significant even for people starting well below their limit. We show this response is consistent with buffer-stock models of precautionary saving. 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. Unlike most other studies, we also find strong effects from changes in account-specific interest rates. The long-run elasticity of debt to the interest rate is approximately -1.3. Less than half of this elasticity represents balance-shifting across cards, with most reflecting net changes in total borrowing. The elasticity is larger for decreases in interest rates than for increases, which can explain the widespread use of temporary promotional rates. The elasticity is smaller for people starting near their credit limits, again consistent with liquidity constraints.

Keywords: permanent-income hypothesis, liquidity constraints, precautionary saving; marginal propensity to consume, interest-rate elasticity; credit supply, consumer credit, credit cards.

JEL Classification: E21, E51, G21

Suggested Citation

Gross, David B. and Souleles, Nicholas S., Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data (February 2000). Wharton FIC Working Paper No. 00-04, Available at SSRN: or

David B. Gross

Compass Lexecon ( email )

332 South Michigan Avenue
Suite 1300
Chicago, IL 60604
United States

Nicholas S. Souleles (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-9466 (Phone)
215-898-6200 (Fax)


National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics