Soft Liquidity Constraints and Consumption: Evidence from Macro Prudential Policy in Turkey

50 Pages Posted: 26 Feb 2015 Last revised: 13 Dec 2017

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Muris Hadzic

Whitman School of Management, Syracuse University

Changcheng Song

National University of Singapore (NUS)

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: December 12, 2017

Abstract

Using account-level credit card data from a major Turkish bank we show the impact of a unique restrictive credit card policy on consumption and debt repayment behavior. The complex policy imposes two types of soft liquidity constraints for certain credit card holders: progressively higher minimum payments over time and cash advances restrictions. We show that increasing minimum payments initially increase credit card spending and debts, then reduce the spending and debts. The policy reduces average monthly credit card debt of affected consumers by about TL184 two years into policy implementation, implying about 15% higher debt repayment ratio. The initial increase in credit card spending is due to intertemporal arbitrage: consumers move forward credit card spending to avoid future high borrowing costs. Restricting cash advances, among other policy mandates, has the strongest effect in reducing credit card spending and promoting faster debt repayment. Policy announcement also has a marginal effect in instigating change in credit card usage behavior. These results are consistent with the theory of liquidity constraints and consumption (Carroll and Kimball 2005). Our results show that a well-designed credit card policy will likely impose significant liquidity constraints instigating change in consumers’ spending and debt payment behaviour.

Keywords: Liquidity Constraints, Credit Constraints, Consumption, Spending, Debt, Credit Cards, Household Finance, Fiscal Policy.

JEL Classification: D12, D14, D91, E21, E51, E62, G21

Suggested Citation

Agarwal, Sumit and Hadzic, Muris and Song, Changcheng and Yildirim, Yildiray, Soft Liquidity Constraints and Consumption: Evidence from Macro Prudential Policy in Turkey (December 12, 2017). Available at SSRN: https://ssrn.com/abstract=2569584 or http://dx.doi.org/10.2139/ssrn.2569584

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Muris Hadzic

Whitman School of Management, Syracuse University ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

Changcheng Song

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
127
Abstract Views
1,062
rank
225,221
PlumX Metrics