Credit Cards and the Floating Rate Channel of Monetary Policy
11 Pages Posted: 11 Jan 2021 Last revised: 24 Mar 2021
Date Written: November 4, 2020
I quantify the impact of Federal Funds Rate (FFR) movements on consumers' welfare via the floating, or variable, rate on their credit cards. I first newly document that 96% of card rates adjust to the FFR within 3 months of a change in the latter. Exploiting these rate changes, I construct a model of card use and estimate it using a large national database of U.S. card accounts. The model estimates imply that a hypothetical 25 bp rise in the FFR lowers annual consumers' surplus by 0.24% of personal consumption expenditures ($33.4 billion), and disproportionately more so in lower income areas.
JEL Classification: E52, G28, G51
Suggested Citation: Suggested Citation