Is the US Consumer Credit Asymmetric?
| Date | 01 May 2016 |
| Published date | 01 May 2016 |
| DOI | http://doi.org/10.1111/sjpe.12082 |
IS THE US CONSUMER CREDIT
ASYMMETRIC?
Saten Kumar
ABSTRACT
We investigate the existence of any asymmetric effects in the US consumer
credit. In doing so, we utilize the asymmetric cointegration methods proposed by
Breitung (2001, 2002) and Enders and Siklos (2001). Furthermore, we tend to
explore two additional dimensions in this literature. First, whether asymmetries
(if any) are persistent over-time in the credit demand model. Second, whether
the Great recession contributed to any asymmetric impacts on the credit demand.
Our results revealed that the long-run relationship of consumer credit (credit,
income, wealth and interest rate on personal loans) is asymmetric. While it is
difficult to identify the direct sources of this asymmetric result, our intuition is
that it is linked to the structural breaks in the rate of personal loans encountered
in the early 1980s. Moreover, we find no strong evidence that much of the asym-
metric impacts in consumer credit were experienced in the Great recession. Nei-
ther have we attained evidence that asymmetric impacts on credit demand are
persistent over-time.
II
NTRODUCTION
During the recent financial crisis, the Federal Reserve and other
policymakers throughout the government took unprecedented
actions to mitigate the fallout from severely distressed market
conditions and support the flow of credit to consumers and
businesses. Nonetheless, the level of credit outstanding for
households has been very slow to rebound and remains lower
than it was at the onset of the crisis. The reasons for the slow
rebound are, without a doubt, complex and multidimensional.
Still, it is worthwhile to examine the data and try to understand
why credit growth is not more robust.
Governor Elizabeth A. Duke of Federal
Reserve System of the US
1
Auckland University of Technology
1
Speech can be found at: http://www.federalreserve.gov/newsevents/speech/duke20101
202a.htm
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12082, Vol. 63, No. 2, May 2016
©2015 Scottish Economic Society.
194
Central banks such as the Federal Reserve (Fed) and European Central Bank
(ECB) does consider the role of consumer credit in their policy decisions (see
ECB, 2004; Bernanke, 2006). There is a widespread consensus among econo-
mists and policy-makers that consumer credit is strongly linked to output and
inflation. There are a number of factors that consumers consider when making
borrowing decisions. For the Fed to precisely measure and monitor the con-
sumer borrowing, there is a need to identify the factors that influence consumer
borrowing and decisions. Consumer spending is the largest share of GDP in the
United States. and has been a key driver of economic growth the country has
experienced since 1990s. Consumer borrowing has always played a strong part
in stimulating consumption spending (Paradiso et al., 2014); in addition it also
has links to consumer debt accumulation. As a proportion of personal income,
consumer credit has more than doubled during the postwar period, with partic-
ularly sharp and sustained increases occurring in the 1980s (see figure 1, Lud-
vigson, 1999). In spite of the attention paid to movements in consumer credit in
the press and the Wall Street, the determinants and effects of growth in con-
sumer credit have not been a major focus of researchers; hence there has been
limited research on the determinants of consumer credit in an economy.
There are many important strands in this literature, for example, existence
of a credit channel in the transmission mechanism of the monetary policy
(Angeloni et al., 2003), role of credit as a non-linear propagator of shocks
(Balke, 2000; Gambacorta and Rossi, 2010), exploring how the dynamics of
real and financial variables are affected by financial shocks using the dynamic
stochastic general equilibrium (DSGE) model (Urban and Quadrini, 2012).
Other studies in this literature have modelled consumer credit using the linear
cointegration methods (Hartropp, 1992; De Nederlandsche Bank, 2000; Calza
et al., 2001, 2003; Hofmann, 2001; Schadler et al., 2004). None of the above
studies have considered modelling credit demand using alternative measures
of interest rate such as rate on personal loans (24 months), short-term rate
(3 years), medium-term rate (10 years), short-term consumer loan rate and the
federal funds rate. With the exception of Balke (2000) and Gambacorta and
Rossi (2010), none have explored the asymmetric long-run adjustments in the
demand-determined consumer credit model.
The objective of this article is to investigate the existence of any asymmetric
effects in the US consumer credit. In doing so, we utilize the asymmetric coin-
tegration methods proposed by Breitung (2001, 2002) and Enders and Siklos
(2001). Existing studies on credit demand asymmetries are scant and we aim
to partly fill this gap by investigating the existence of asymmetric effects on
credit demand. Furthermore, we tend to explore two additional dimensions in
this literature. First, whether the asymmetries (if any) are persistent over time
in the credit demand model. Second, whether the Great recession contributed
to any asymmetric impacts on the credit demand. The testing of non-linear
relationships has gained an increasing attention in the time series literature
and it is generally believed that some economic variables may be highly non-
linear; see Fan et al. (2004) and Paradiso et al. (2014). Generally speaking,
the sources of non-linearity may be due to market frictions, heterogeneous
IS THE US CONSUMER CREDIT ASYMMETRIC? 195
Scottish Journal of Political Economy
©2015 Scottish Economic Society
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