Download or read book An Investigation of Credit Card Debt written by Tufan Ekici and published by . This book was released on 2006 with total page 111 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: It has been argued that there are irrational elements in the credit card market since consumers borrow on cards at very high interest rates. Previous empirical investigations have used the nominal interest rate as a determinant of borrowing. In this part of my dissertation I analyze whether the expected real interest rate has an effect on borrowing behavior. I use a new set of monthly survey data (Ohio Economic Survey or OES) that has information on both price and income expectations and credit card use. Censored regression estimation results show that when price expectations are taken into account, consumers adjust their credit card borrowing to the expected real interest rate. Credit card borrowing is also found to be significantly related to two key income components of consumer confidence. Thus the behavior of credit card users is shown to be more complex than what has been argued in previous research, and based on these findings could not be characterized as irrational. The second part of my work investigates the effect of credit card debt on households' consumption. The existing literature offers evidence for the effect of some aggregate debt measures on aggregate consumption growth. I first show that a new index specifically designed to capture credit card indebtedness is able to explain up to 14 percent of aggregate durable consumption growth. The index again utilizes the OES data and incorporates some variables that have generally been unavailable to researchers. I then combine two micro data sets, the Consumer Expenditure Survey and the OES, to test for the extent to which individual households' spending decisions can be accounted for by credit card debt. I use two-sample-two-stage least squares (2S2SLS) method to estimate reduced form Euler equations and include lagged household debt as an explanatory variable. The results show that credit card debt negatively affects consumption growth. A one percent increase in credit card debt leads to a $1,000 decrease in household's total spending. Even though in aggregate data we see that spending increases as debt increases, looking at the individual household level data tells a different story. These results indicate the need to evaluate the long-run effects of credit card debt more carefully.