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A Model of the Consumption Response to Fiscal Stimulus Payments

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  • Greg Kaplan
  • Giovanni L. Violante

Abstract

A wide body of empirical evidence, based on randomized experiments, finds that 20-40 percent of fiscal stimulus payments (e.g. tax rebates) are spent on nondurable household consumption in the quarter that they are received. We develop a structural economic model to interpret this evidence. Our model integrates the classical Baumol-Tobin model of money demand into the workhorse incomplete-markets life-cycle economy. In this framework, households can hold two assets: a low-return liquid asset (e.g., cash, checking account) and a high-return illiquid asset (e.g., housing, retirement account) that carries a transaction cost. The optimal life-cycle pattern of wealth accumulation implies that many households are "wealthy hand-to-mouth" : they hold little or no liquid wealth despite owning sizeable quantities of illiquid assets. They therefore display large propensities to consume out of additional income. We document the existence of such households in data from the Survey of Consumer Finances. A version of the model parameterized to the 2001 tax rebate episode is able to generate consumption responses to fiscal stimulus payments that are in line with the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17338.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17338

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References

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  1. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
  2. Greg Kaplan & Giovanni L. Violante, 2010. "How Much Consumption Insurance beyond Self-Insurance?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 53-87, October.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. A Model of the Consumption Response to Fiscal Stimulus Payments
    by Christian Zimmermann in NEP-DGE blog on 2011-08-31 14:32:20
  2. Who spent the 2001 Bush tax rebate?
    by Economic Logician in Economic Logic on 2011-09-14 14:37:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," NBER Working Papers 17240, National Bureau of Economic Research, Inc.
  2. Christopher D. Carroll, 2012. "Implications of Wealth Heterogeneity For Macroeconomics," Economics Working Paper Archive 597, The Johns Hopkins University,Department of Economics.
  3. Veronica Guerrieri & Guido Lorenzoni, 2011. "Credit Crises, Precautionary Savings, and the Liquidity Trap," NBER Working Papers 17583, National Bureau of Economic Research, Inc.
  4. Giacomo De Giorgi & Luca Gambetti, 2012. "The Effects of Government Spending on the Distribution of Consumption," UFAE and IAE Working Papers 905.12, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  5. Misra, Kanishka & Surico, Paolo, 2011. "Heterogeneous Responses and Aggregate Impact of the 2001 Income Tax Rebates," CEPR Discussion Papers 8306, C.E.P.R. Discussion Papers.
  6. Blundell, Richard William & Pistaferri, Luigi & Saporta-Eksten, Itay, 2012. "Consumption Inequality and Family Labor Supply," CEPR Discussion Papers 9172, C.E.P.R. Discussion Papers.
  7. Midrigan, Virgiliu & Philippon, Thomas, 2011. "Household Leverage and the Recession," CEPR Discussion Papers 8381, C.E.P.R. Discussion Papers.
  8. Brant Abbott & Giovanni Gallipoli & Costas Meghir & Giovanni L. Violante, 2013. "Education Policy and Intergenerational Transfers in Equilibrium," NBER Working Papers 18782, National Bureau of Economic Research, Inc.
  9. Robert E. Hall, 2012. "Monitoring the Financial Condition and Expenditures of Households," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling National Bureau of Economic Research, Inc.
  10. Christopher D. Carroll, 2012. "Representing Consumption and Saving Without A Representative Consumer," NBER Chapters, in: Measuring Economic Sustainability and Progress National Bureau of Economic Research, Inc.
  11. Jonathan A. Parker, 2012. "LEADS on Macroeconomic Risks to and from the Household Sector," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling National Bureau of Economic Research, Inc.
  12. Halevy, Yoram, 2012. "Time Consistency: Stationarity and Time Invariance," Micro Theory Working Papers yoram_halevy-2012-19, Microeconomics.ca Website, revised 24 Jun 2012.
  13. Luci Ellis & Mariano Kulish & Stephanie Wallace, 2012. "Property Market Cycles as Paths to Financial Distress," RBA Annual Conference Volume, in: Alexandra Heath & Frank Packer & Callan Windsor (ed.), Property Markets and Financial Stability Reserve Bank of Australia.

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