We study the consumption response to the provision of credit lines to individuals that previously did not have access to credit combined with the possibility to elicit directly a large set of preferences, beliefs, and motives. As expected, users react to the availability of credit by increasing their spending permanently and reallocating consumption from non-discretionary to discretionary goods and services. Surprisingly, though, liquid users react more than others and this pattern is a robust feature of the data. Moreover, liquid users lower their savings rate, but do not tap into negative deposits. The credit line seems to act as a form of insurance against future negative shocks and its mere presence makes users spend their existing liquidity without accumulating any debt. By eliciting preferences, beliefs, and motives directly, we show these results are not fully consistent with models of financial constraints, buffer stock models with and without durables, present-bias preferences, uncertainty about future income, bequest motives, or the canonical life-cycle permanent income model. We label this channel the perceived precautionary savings channel, because liquid households behave as if they faced strong precautionary savings motives even though no observables suggest they should based on standard theoretical models.

More Research From These Scholars

BFI Working Paper Jan 1, 2017

Flexible Prices and Leverage

Francesco D'Acunto, Ryan Liu, Carolin Pflueger
Topics:  Fiscal Studies
BFI Working Paper Aug 16, 2019

Managing Households’ Expectations with Simple Economic Policies

Francesco D’Acunto, Daniel Hoang, Michael Weber
Topics:  Fiscal Studies, Monetary Policy
BFI Working Paper Jun 29, 2017

Monetary Policy Slope and the Stock Market

Andreas Neuhierl, Michael Weber
Topics:  Financial Markets, Technology & Innovation, Fiscal Studies