| My dissertation analyzes U.S. consumers' use of money and credit as means of payment and, in the case of credit cards, as a device that aids inter-temporal consumption smoothing.;Money demand has received little attention in the literature lately, especially when compared to earlier decades, but our work with Scott Schuh shows that the proliferation of the ways consumers can make payments has important implications for the demand for various liquid assets. Therefore, accurate estimates of the demand for liquid asset needs to take payment instrument adoption and use into account. Data collected by the Consumer Payments Research Center of the Federal Reserve Bank of Boston provides a good starting point for such analysis, as shown in the first two chapters of the dissertation.;The final chapter analyzes another aspect of consumer credit, namely, it's usefulness in smoothing income fluctuations. This model is interesting because for agents in the model to use credit for consumption smoothing it has to be defaultable.;The default option, however, induces a moral hazard problem: The additional insurance from bankruptcy protection leads to lower precautionary saving than in a similar model with no credit (or, equivalently, with non-defaultable credit). In general equilibrium, however, this decrease in savings leads to a lower aggregate capital stock and hence wages. In the calibration, the introduction of unsecured consumer credit results in a significant welfare loss in the economy as a whole.;The first chapter, joint with Scott Schuh, estimates U.S. consumers' demand for cash using a new panel micro data for 2008--2010, employing econometric methodology similar to that in Mulligan and Sala-i-Martin (2000); Attanasio et al. (2002); and Lippi and Secchi (2009). We extend the Baumol-Tobin model to allow for credit card payments and revolving debt, as in Sastry (1970).;With interest rates near zero, cash demand by consumers using credit cards for convenience (without revolving debt) has the same small, negative, interest elasticity as estimated in earlier periods and with broader money measures. However, cash demand by consumers using credit cards to borrow (with revolving debt) is interest inelastic. These findings have implications for the welfare cost of inflation because the nontrivial share of consumers who revolve credit card debt are less likely to switch from cash to credit. Our estimation also shows that accounting for the heterogeneous transactions costs that consumers face, when getting cash from bank and nonbank sources, is essential to identify cash demand properly.;The second chapter, also joint with Scott Schuh, looks at consumers' demand for transactions balances at an even more granular level than the first chapter. Using the 2012 Diary of Consumer Payment Choice (DCPC), we first document the substantial changes in payment instrument use of U.S. households compared to the results in Klee (2008) (which were based on data from 2001): Checks have virtually disappeared from purchase transactions, while still play a role in bill payments. Cash, on the other hand, still plays a large role for low-value transactions. Then we proceed to jointly analyze payment instrument use and consumers' demand for liquid assets. Results indicate that payment instrument choice is an integral part of consumers' cash management practices and hence cash demand; therefore, contrary to simple Baumol-Tobin models, they should be analyzed together.;The final chapter in the dissertation is admittedly different from the previous two. While credit cards, more precisely unsecured consumer credit, is still the object of the analysis; the main focus is not on its role in settling transactions but on its role in inter-temporal consumption smoothing. In particular, the unsecured nature of credit card loans enable households to smooth consumption even in the face of large income disruptions, since bankruptcy protection provides them a way out of the mounting debt burden if their income stream deteriorates for too long. In fact, consumer defaults in the United States are counter-cyclical, suggesting that households use bankruptcy protection as a way to smooth consumption in the face of aggregate shocks. This chapter analyses the value of the option to default in a computable general equilibrium model similar to Krusell and Smith (1998).;Model simulations show that unsecured borrowing helps the poorest consumers maintain a more stable consumption path when compared to an economy without bankruptcy and hence borrowing. For the economy as a whole, this utility gain, however, is offset by the effects of a declining average wage, resulting from a smaller aggregate capital stock, as consumers are less inclined to self-insure against income shocks in the presence of the option to default. This hits asset-poor households in the middle of the wealth distribution. |
