Consumption Response to Credit Expansions: Evidence from Experimental Assignment of 45,307 Credit Lines
I design and implement a large scale field experiment in an economy that had been experiencing a decade long debt driven consumption boom, in which I construct a randomized credit line extension that isolates selection and interest rate effects, and track impulse responses using comprehensive data on spending and consumer balance sheets. I document substantial indirect effects of credit, and that the propensity to borrow and spend out of credit remains quantitatively large for those with substantial slack in borrowing capacity, as well as those with a sizable buffer of assets. I use data on the dynamics of the response and expenditure composition to distinguish two classes of potential explanations: one embracing precautionary savings in response to a credit constraint that may bind in the future; and the other invoking behavioral explanations based on myopia or dynamically inconsistent behavior. The reduced form findings provide strong support for a buffer stock model emphasizing the importance of precautionary savings.