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Mental Accounts and Consumption Sensitivity Across the Distribution of Liquid Assets

Author

Listed:
  • James Graham
  • Robert A. McDowall

Abstract

We study consumption spending responses to predictable income using household-level data from a U.S. financial institution. Even for households with large liquid asset balances, we find no spending in anticipation of income receipt, substantial spending following receipt, and significant front-loading with respect to date of receipt. To rationalize these findings, we develop a tractable model of mental accounts where consumption choices are partitioned across current income and current assets. Our model reproduces the timing, magnitude, and cross-section of consumption responses observed in the data. Finally, we use the model to study the effectiveness of targeted and untargeted fiscal stimulus policies.

Suggested Citation

  • James Graham & Robert A. McDowall, 2024. "Mental Accounts and Consumption Sensitivity Across the Distribution of Liquid Assets," CAMA Working Papers 2024-25, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2024-25
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2024-04/25_2024_graham_mcdowall.pdf
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    More about this item

    Keywords

    consumption; MPC; excess sensitivity; mental accounts; fiscal stimulus;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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