Credit Card Debt and Payment Use

Approximately half of credit card holders in the United States regularly carry unpaid credit card debt. These so-called revolvers exhibit payment behavior that differs from that of those who repay their entire credit card balance every month. Previous literature has focused on the adoption of debit cards by people who carry credit card balances, but so far there has been no empirical analysis exploring the relationship between revolving behavior and patterns of payment use, such as substitution away from credit cards to other payment methods. Using data collected in the 2005 Survey of Consumer Payment Preferences, we explore the relationship between revolving credit card balances and payment use. We find that credit card revolvers are significantly more likely to use debit and less likely to use credit than convenience users who repay their balances each month. There is no significant difference between these two types of credit card users in their use of check or cash. The two groups differ in their perceptions of payments as well as in their payment behavior: revolvers are significantly less likely to view debit as superior with respect to ease of use and acceptability, but more likely to see debit as superior with respect to control over money and budgeting

Consumer Credit and Payment Cards

We consider debit and credit card networks. Our contribution is to introduce the role of consumer credit into these payment networks, and to assess the way this affects competition and equilibrium fees. We analyze a situation in which overdrafts are associated with current accounts and debit cards, and larger credit lines with ‘grace’ periods are associated with credit cards. If we just introduce credit cards, we find their merchant fees depend not only on the networks’ cost of funds and the probability of default, but also on the interest rates of overdrafts. Whilst debit card merchant fees do not depend on funding costs or default risk in a debit-card only world, this changes when they start to compete with credit cards. First, debit merchant acceptance increases with the default probability, even though merchant fees increase. Second, an increase in funding costs causes a surprising increase in debit merchant fees. Effectively, the bank offering the debit card benefits from consumers maintaining a positive current account balance, when they use their credit instead of their debit card. As a result, this complementarity may lead to relatively high debit card merchant fees as the bank discourages debit card acceptance at the margin

Payment Networks in a Search Model of Money

In a simple search model of money, we study a special kind of memory that gives rise to an arrangement resembling a payment network. Specifically, we assume that agents can pay a cost to access a central database that tracks payments made and received. Incentives must be provided to agents to access the central database and to produce when they participate in this arrangement. We also study policies that can loosen these incentive constraints. In particular, we show that a “no-surcharge” rule has good incentive properties. Finally, we compare our model with that of Cavalcanti and Wallace

Discussion of “Precautionary Demand for Money in a Monetary Business Cycle Model”

Velocity is more volatile than output and procyclical in data. However, standard CIA model implies constant (consumption) velocity (always binding CIA constraint). Agents hold exactly the amount of money necessary for desired cash-good purchase, when there is a positive cost of holding money. How can we break the (too tight) link between nominal output/consumption and money balance? Makoto Nakajima (FRB Philadelphia) Discussion of Telyukova and Visschers March 27, 2009 2 / 11Intuition: CIA and Preference Shock CIA + aggregate preference shock after money balance is chosen. Variable velocity with precautionary money demand. But the velocity fluctuates too little compared with data because aggregate consumption fluctuates too little. (quantitative puzzle, Hodrick et al. (1991)) Why idiosyncratic shock helps? Idiosyncratic preference shock might help because size of the shock is substantially larger: SD = 18% (compare with SD = 0.5 % for aggregate consumption). Volatility of idiosyncratic preference shocks is the key in calibration. Makoto Nakajima (FRB Philadelphia) Discussion of Telyukova and Visschers March 27, 2009 3 / 11What They Did Standard RBC model plus: CIA constraint. Cash goods and credit goods. Idiosyncratic preference shock. TFP and monetary policy shocks. Investigate, theoretically and quantitatively, cyclical properties of the model, with a focus on velocity

Outside Versus Inside Bonds

When agents are liquidity constrained, two options exist — borrow or sell assets. We compare the welfare properties of these options in two economies: in one, agents can borrow (issue inside bonds) and in the other they can sell government bonds (outside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds and that the converse is not true. Moreover, under best policies, the allocation with outside bonds strictly Pareto dominates the allocation with inside bonds