A0432
Title: Assessing liquidity constraints: Does credit matter for the permanent income hypothesis
Authors: Neville Francis - UNC Chapel Hill (United States) [presenting]
Abstract: Recently, the validity of the permanent income hypothesis (PIH), a fundamental consumer behavior theory first proposed by an early study, has been questioned. A recent study found that when credit cards were issued to individuals who didn't previously have them, those with the highest savings experienced the largest change in consumption spending. This finding is out of line with the PIH's predictions: the PIH would predict that individuals with the least wealth would find the most relief from this new credit line and should react more. It is argued that the PIH can be rescued, and a model in which the above counterintuitive results are consistent with the PIH is proposed. The argument rests on the steadystate to which we make comparisons. In particular, it is argued that credit margins are important for model outcomes. The incentive to use cash versus credit hinges on the money already in hand. Recent studies have focused on the extensive margins and reached conclusions that question the theory's validity. However, the PIH theory may persist if a model is considered to expand rather than introduce credit. The aim is to propose a model in which, in comparison to a no-credit equilibrium, the extensive credit margin appears to invalidate the PIH, but in the presence of a steady state with credit, the intensive credit margin the PIH holds.
