The reaction of consumer spending and debt to tax rebates: Evidence from consumer credit data
AbstractWe use a new panel dataset of credit card accounts to analyze how consumer responded to the 2001 Federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards their spending increased, counter to the canonical Permanent-Income model. Spending rose most for consumers who were initially most likely to be liquidity constrained, whereas debt declined most (so saving rose most) for unconstrained consumers. More generally, the results suggest that there can be important dynamics in consumers response to lumpy increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms. --
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Bibliographic InfoPaper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/01.
Date of creation: 2007
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Consumption; Saving; Life-Cycle Model; Permanent-Income Hypothesis; Liquidity Constraints; Fiscal Policy; Tax Cuts; Tax Rebates; Windfalls; Credit Cards; Consumer Credit; Consumer Balance Sheets; Household Finance;
Find related papers by JEL classification:
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- G2 - Financial Economics - - Financial Institutions and Services
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
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