'Til debt do us part: an empirical analysis on whether consumer sentiment influences the use of revolving credit in Australia.

Author:Korkofingas, Con

    The rising level of revolving credit (credit cards) in Australia since the mid 1980s has generated a great deal of interest from policymakers, the media, consumer advocates and academics. The growth in consumer credit in Australia since the mid 1980s, whether examined in nominal or real terms, has been substantial. In the decade to 2002 the annual growth rates for credit card debt averaged 17.4% and, 20.9% in the second half of the decade (Griffiths, 2007; Reserve Bank of Australia, 2009). The growth in revolving credit has substantially exceeded the growth in income over the same period while the ratio of revolving credit to non-revolving credit (installment loans for cars etc) has significantly increased.

    This substantial increase in revolving credit (to mainly finance consumption) may be of concern if the level of borrowing places a significant future repayment burden on individuals and families. In particular, if expectations of future income on which the borrowing is based are revealed to be overly optimistic this may impact severely on future household budgets (Lamdin, 2008; Maki, 2002; Griffiths, 2007). The capacity of consumers to repay debt burdens may also have implications for future macroeconomic stability and hence is of particular interest to policy makers. It would thus be of interest to examine what factors influence, or can be used to predict changes, to the levels of revolving credit.

    In general, consumers are likely to consume more if they feel more confident of their economic environment. They would be more likely to finance this increased consumption with increasing amounts of unsecured finance or revolving credit if they expect, through higher expected future income, to have the capacity to repay this debt. Consumer sentiment, in theory, measures confidence in current economic conditions and expectations of future economic conditions and income. Thus a relevant question is whether changes in consumer sentiment can be useful in explaining or predicting changes in consumption and revolving credit. This question is important and relevant for two primary reasons. First, many studies, after controlling for various factors, have argued that there exists a significant relationship between consumer sentiment and consumption. The importance of this cannot be understated given that consumption for most developed countries represents approximately 65-70 percent of GDP (Bryant and Macri, 2005; Ludvigson, 2004; Bram and Ludvigson, 1998; Gittens, 2009). Second, it has been argued in the media and academic research that consumer confidence, consumer credit and the economy are significantly related and clearly pertinent in the context of the recent global financial crisis. This study seeks to establish whether this relationship between consumer sentiment and revolving credit exists and if so, what implications and inferences can be drawn from these results. The primary question to be addressed in this paper is of both academic and policymaker's interest, as it provides information on consumer behavior, particularly in the context of discretionary spending. Furthermore, it provides additional relevance to policymakers insofar as it articulates the factors that influence the increasing burden on consumer and the potential impact on macroeconomic stability. It is important to stress that rising consumer credit might not be necessarily problem per se, however it may be the serviceability of this burgeoning debt that is also important for the consumer.

    The objective of this paper is to examine whether consumer sentiment, an indicator designed to gather information on the relative financial health, spending power and confidence of the average consumer about the future of the economy, influences the level and changes of revolving credit. The empirical approach adopted in this paper is the use of the Granger Causality tests, which is consistent with several other international studies

    The paper is organized as follows. Section 2 provides a review of the literature on consumer sentiment, consumption and credit. Section 3 outlines the methodology and data used in this paper. Section 4 presents and discusses the empirical results. Section 5 provides concluding comments.


    We survey the theoretical and empirical literature on consumer sentiment and expenditure on consumption. It is important to note however, that there are no studies that we are aware of, apart from Lamdin (2008), that have explored the direct issue of consumer sentiment and revolving credit. Lamdin (2008) found, using Granger Causality tests, that consumer sentiment influences the use of revolving credit in the United States. An interesting aspect of this study was that this conclusion emerged in models that used a lag structure of 12 months and, with more robust results when the lag period was extended to almost 2 years. This study suggested that consumer sentiment was not simply an aberration, but contained important information on the spending habits of consumers. Studies in this area have primarily focused on consumer sentiment and its impact on consumption durables and non-durables. Therefore, the following literature focuses upon the longstanding and indirect impact of consumer sentiment on revolving credit through the consumption channel.

    Research that has examined the relationship between consumer sentiment and its impact on consumption expenditures is not new. Katona (1968) argued that consumer sentiment...

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