Investigating the US consumer credit determinants using linear and non-linear cointegration techniques

Abstract

This paper has investigated the determinants of total consumer credit for the USA over the period 1968:Q1 to 2011:Q3. Using Breitung's (2001) non-parametric rank tests, we find the existence of linear cointegrating relationships in the consumer credit models. Enders and Siklos' (2001) threshold adjustment tests revealed that non-linearity is present slightly (with a statistical significance of 10% level) in the consumer credit model with a short-term interest rate (federal funds rate), while there exists a linear and symmetric cointegrating relationship in the models with medium (3years) and long (10years) term interest rates. Application of the linear cointegrating techniques (fully modified OLS, canonical cointegrating regression and general to specific) show that consumer credit responds more significantly to the medium and long-term interest rates than the short-term interest rate. We use these results to assess the popular belief that abnormality in the consumer credit set the stage for the 2007–08 crisis and severe recession.