Perspectives on Research Issues in Consumer Behavior
Santomero, Anthony M., Business Review (Federal Reserve Bank of Philadelphia)
Based on the speech President Santomero delivered to the Conference on Consumer Transactions and Credit, March 22-23, 2001
Generally, economic forums have tended to ignore the broader issues in consumer credit, preferring to focus on the valuation of more standard corporate financial claims. When the consumer is discussed, it is typically consumer consumption and savings decisions that are studied and analyzed. This neglect of consumer credit seems remarkable, given that debt owed by households represents over 25 percent of total credit market debt outstanding; that consumer credit, excluding mortgages, makes up over 10 percent of commercial bank credit; and that the outstanding volume of consumer credit, including mortgages, exceeds the volume of U.S. government debt.
There is no single reason for the omission of consumer financial assets from the research agenda of the academic community, but I can offer a few rationalizations. The first is that macroeconomists -- even those who specialize in monetary theory -- have had little interest in the detailed behavior of asset choice at the consumer level. They prefer to concentrate on consumption theory and the associated empirical tests of these theories, rather than analyze the allocation of savings and wealth dynamics. Second, specialists in finance have tended to concentrate on firm-level behavior because firms are viewed as more rational players than consumers and firms' behavior is of more economic value. Asset sizes are bigger; representative agents are more easily modeled; and market discipline seems to force the decision maker closer to the optimal economic choice.
Only recently has this begun to change. With the emergence of the asset-based security markets, financial theorists and empiricists have begun to examine the behavior of financial assets that have resulted from the aggregation of consumer debt. This is most obvious in the mortgage market, where the emergence of various types of securitized mortgage instruments fostered research on their valuation and time-series dynamics. This interest has recently been expanded into other types of asset-based securities, such as CARDs, CARs, and CLOs. In each case, to analyze the underlying asset, the researcher has to examine optimal decisions of a representative agent and the impact of aggregating individual claims on instrument behavior.
Another development that has helped spur interest in the microeconomics of consumer financial decisions is the intellectual shift that has taken place in macroeconomics toward a well-specified microeconomic foundation for macroeconomic theories. It is now acknowledged that to understand consumption and savings decisions on the macro level, we must model the behavior of individual agents. And this interest in microfoundations has been accompanied by the development of new data sets, such as the Federal Reserve's triennial Survey of Consumer Finances, the Consumer Expenditure Survey, and the Panel Study of Income Dynamics, that present information at a disaggregated level to allow for testing of these micro theories.
Yet, despite recent interest in consumer debt instruments, there is much work to be done. This conference is just the first of many efforts that we at the Federal Reserve Bank of Philadelphia plan to make to advance the consumer credit research agenda. We hope to shed light on the state of research and to spotlight areas of potential future contributions.
In my comments I will try to put the current literature on consumer finance into context and explain why consumer credit should have a place in academic research between standard macro modeling and the valuation of standard financial assets. I will also try to set out a list of issues that must be studied to further our knowledge and understanding of one part of the financial landscape that continues to grow at double-digit rates.
CONSUMPTION THEORY AND THE RESEARCH QUESTIONS IN MACROECONOMICS
I'll begin with the standard view of consumer choice presented in macroeconomic theory. …