Soft Liquidity Constraints and Consumption : Evidence from Macro Prudential Policy in Turkey

Using account-level credit card data from a major Turkish bank we show the impact of a unique restrictive credit card policy on consumption and debt repayment behavior. The complex policy imposes two types of soft liquidity constraints for certain credit card holders: progressively higher minimum payments over time and cash advances restrictions. We show that increasing minimum payments initially increase credit card spending and debts, then reduce the spending and debts. The policy reduces average monthly credit card debt of affected consumers by about TL184 two years into policy implementation, implying about 15% higher debt repayment ratio. The initial increase in credit card spending is due to intertemporal arbitrage: consumers move forward credit card spending to avoid future high borrowing costs. Restricting cash advances, among other policy mandates, has the strongest effect in reducing credit card spending and promoting faster debt repayment. Policy announcement also has a marginal effect in instigating change in credit card usage behavior. These results are consistent with the theory of liquidity constraints and consumption (Carroll and Kimball 2005). Our results show that a well-designed credit card policy will likely impose significant liquidity constraints instigating change in consumers' spending and debt payment behaviour