Consumption Smoothing or Consumption Binging? The Effects of Government-Led Consumer Credit Expansion In Brazil

Abstract

Brazil initiated a major credit expansion program through government banks in 2011. The program primarily targeted public sector workers with offers of payroll-backed loans. Using individual-level administrative data we find that the program led to a 15 percentage point rise in debt to initial income for public sector workers. We develop a new method for estimating workers' expected income growth, and show that ``consumption smoothing'' cannot explain the rise in consumer borrowing. Instead, the evidence supports ``consumption binging'': less financially sophisticated workers borrowed more at high real interest rates, and experienced both higher consumption volatility and lower average consumption.

Keywords: credit booms, payroll loans, credit card expenditure

JEL Classification: D12, D14, E21, E32, G21, G28