Precautionary Borrowing and the Credit Card Debt Puzzle

Jeppe Druedahl; Casper Nordal Jørgensen

Precautionary Borrowing and the Credit Card Debt Puzzle

Jeppe Druedahl, Casper Nordal Jørgensen

Department of Economics

Abstract

This paper addresses the credit card debt puzzle using a generalization of the buffer-stock consumption model with long-term revolving debt contracts. Closely resembling actual US credit card law, we assume that card issuers can always deny their cardholders access to new debt, but that they cannot demand immediate repayment of the outstanding balance. Hereby, current debt can potentially soften a household’s borrowing constraint in future periods and thus provides extra liquidity. We show that for some in- termediate values of financial net worth it is indeed optimal for households to simultaneously hold positive gross debt and positive gross assets even though the interest rate on the debt is much higher than the return rate on the assets. Including a risk of being excluded from new borrowing which is positively correlated with unemployment, we are able to simultaneously explain a substantial share of the observed borrower-saver group and match a high level of liquid net worth.

Original language	English
Number of pages	49
Publication status	Published - 8 Oct 2015

Series	Danmarks Nationalbank. Working Papers (Online)
Number	98
Volume	2015
ISSN	1602-1193

Keywords

Faculty of Social Sciences

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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Cite this

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ER -

Precautionary Borrowing and the Credit Card Debt Puzzle

Abstract

Keywords

UN SDGs

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