Structural Breaks and Consumer Credit: Is Consumption Smoothing Finally a Reality?

Has structural change in consumer credit made consumption smoother? Given recent empirical analysis the consumer's inability to smooth consumption appears as prevalent as ever. In this paper, however, I show that structural change in consumer credit appears to have made consumption smoothing a reality. First, using the statistical methods of Bai and Perron (1998, 2003), I find structural breaks in the series for consumer credit and consumption at various points from 1959 through 2005. Most notably, structural breaks occur in total consumer credit and revolving consumer credit in the 1990s. Based on the break date estimates, I estimate a structural equation of consumption growth in line with previous empirical tests of the permanent income hypothesis. Consumption smoothing is evident in the data after the mid-1980s and into the 2000s. The findings of this paper have important implications for a variety of economic research. The evidence for consumption smoothing bears directly on the efficacy of monetary policy and fiscal policy, as well as on the recent discussion of the decline in macroeconomic volatility since the 1980s.