How Does Access to Credit Impact Consumer Expenditure and Savings?

Theory suggests that credit access can stimulate consumption either by relaxing liquidity constraints or reducing the need for precautionary savings. The existing empirical work documents that access to credit both along intensive and extensive margin does stimulate consumption primarily by relaxing liquidity constraints (Gross and Souleles, 2002; Agarwal et al., 2017; Aydin, 2021). However, the existing studies mainly rely on data that cover only the liability (debt) side of an individual’s balance sheet. The ideal data to examine why and how credit shocks affect household behavior should contain information regarding the overall balance sheet of the individuals, that is, both debt and savings.