Terrorist Attacks and Household Consumption Smoothing through Credit Cards

51 Pages Posted: 9 Mar 2021 Last revised: 21 Jul 2022

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Weiqiang Tan

Education University of Hong Kong; The Education University of Hong Kong

Xin Zou

Hong Kong Baptist University (HKBU)

Date Written: July 21, 2022

Abstract

This paper uses high-frequency individual-level data on financial activities to examine the causal impact of terrorist attacks on household consumption smoothing through credit cards. We document that attack-hit consumers increase the weekly share of credit card spending by 28 basis points more than the non-attack-hit consumers during the five weeks on and after the terrorist attacks. Consumption smoothing is stronger when the impact of the attack is larger. Consistent with a precautionary liquidity demand with mental accounting mechanism, we document a stronger response among individuals with higher liquidity constraints, a significant increase in liquid financial asset balance, and a shift of spending from debit accounts to credit cards. We also observe an increase in both risky and safer investments. Consumption smoothing is quick but non-persistent and does not lead to significant long-term impacts on credit card debt and salary income. Overall, our study highlights the real economic impact of uncertainty shocks on micro-level household consumption smoothing.

Keywords: Terrorist attacks, consumption smoothing, economic uncertainty, precautionary liquidity demand, credit cards, bank cards, household finance

JEL Classification: D12, D14, G21, G51

Suggested Citation

Agarwal, Sumit and Ghosh, Pulak and Tan, Weiqiang and Tan, Weiqiang and Zou, Xin, Terrorist Attacks and Household Consumption Smoothing through Credit Cards (July 21, 2022). Available at SSRN: https://ssrn.com/abstract=3754751 or http://dx.doi.org/10.2139/ssrn.3754751

Sumit Agarwal

National University of Singapore ( email )

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

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

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Weiqiang Tan

Education University of Hong Kong ( email )

Dept of Social Sciences
Education University of Hong Kong
Tai Po, NT 11111
Hong Kong

The Education University of Hong Kong ( email )

Tai Po
Hong Kong
Hong Kong

Xin Zou (Contact Author)

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

HOME PAGE: http://sites.google.com/site/shirleyxinzou/

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