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The Short-Run Effects of Instalment Credit Control
Published online by Cambridge University Press: 07 November 2014
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In an earlier paper, I presented an analysis of the intermediate-run effects of instalment credit control, that is, the effects prevailing after the new credit terms have fully replaced the old ones. Although brief reference was made there to the effects of control in the short run, that is, in the time periods immediately following the change in credit terms, yet several interesting questions regarding the short run had to be ignored because of the scope of that paper. One may ask, for example: Does the down-payment effect tend to grow or diminish in strength from one period to the next during the transition from old credit terms to new ones? What about the maturity effect? Do these effects change with time, if at all, at a steady rate? In one direction only, or with reversals)? And how will different types of consumer reaction to new credit terms, as reflected in the amount of credit purchases, modify the down-payment and maturity effects, especially when there is perversity? These questions are important because for purposes of credit control policy, the short-run effects are in many cases more relevant than the intermediate-run effects. The present paper seeks to answer these questions.
As the questions themselves suggest, the following discussion will be principally concerned with the delineation of the time paths of effects of credit term changes. In this sense, then, the paper pertains to the realm of “dynamics,” in contrast to the comparative-statics orientation of the earlier article. As in the earlier paper, I shall assume (a) a constant rate of growth of credit purchases before control, (b) uniform down-payment and maturity terms on all credit purchases, (c) straight-line amortization of all instalment debts, and (d) the absence of secondary effects. But instead of assuming that new credit terms will always result in a new (fixed) rate of growth of instalment purchases, I shall also consider several other types of consumer reaction. Finally, to make the analysis more general, the concept “marginal propensity to cut outlays for down payments” will be introduced, to supplement the “marginal propensity to cut outlays for instalments” used in the other paper.
- Type
- Articles
- Information
- Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 27 , Issue 3 , August 1961 , pp. 359 - 366
- Copyright
- Copyright © Canadian Political Science Association 1961
References
1 Chiang, Alpha C., “Instalment Credit Control: A Theoretical Analysis,” Journal of Political Economy, LXVII, 08, 1959, 363–76.CrossRefGoogle Scholar
2 The symbol c is used instead of c i in the earlier paper.
3 Given m″ < m, and since P m ″ > P 0 by the assumption of a positive r, the expression (c i /m – c i /m″)(1 – d)(P m ″ – P 0) is negative, but (c i /m)(1 – d)P 0 is positive. A term-by-term comparison of these two expressions, however, will show that the entire quantity is most likely to assume a positive value. In the first place, (P m – P 0) should be smaller than P 0 itself, even though P m ″ involves a compound-interest type of growth from P 0, especially since m″ represents a shortened maturity, and hence implies less compounding. Secondly, the absolute value of (c i /m – c i/m″) should be smaller than (c i /m), unless m″ is less than half of m, which would constitute a very drastic change indeed. Thus the positive component is likely to outweigh the negative component, making the entire quantity positive.
4 The change in m-effect from period m to period (m + 1) is represented in this case by the expression (c i /m – c i m″)(1 – d)(P m – P 0) – (c i/m″)(1 – d) P 0. Since (c i /m – c i /m″) is positive when m″ > m, and (P m – P 0) is negative under the assumption of a negative r, the first component of that expression is negative, just as is the second component. Thus the entire expression is opposite in sign to the expressions in Equations (14) and (15). The change in the m-effect between periods (m + 1) and (m + 2) is equal to (c i m – c i /m″)(1 – d)(P m + 1 – P 1) – (c i/m″)(1 – d) P 1, which is (1 + r) times the preceding change.
5 Within the cited ranges for ci and m, the smallest possible value of ci/m is 0.031, attained when ci = 0.75 and m = 24 periods. This is why the figure of r = 0.03 is given as the limit. With a larger ci and/or a smaller m, the reversal of the d-effect can result even from an r in excess of 0.03.
6 This is true also of housing credit, therefore the discussion in Case 2 will apply to housing credit as well.