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The Reaction of Consumer Spending and Debt to Tax Rebates-Evidence from Consumer Credit Data

  • Sumit Agarwal
  • Chunlin Liu
  • Nicholas S. Souleles

We use a new panel data set of credit card accounts to analyze how consumers 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 afterward their spending increased, counter to the 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. (c) 2007 by The University of Chicago. All rights reserved..

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 115 (2007)
Issue (Month): 6 (December)
Pages: 986-1019

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Handle: RePEc:ucp:jpolec:v:115:y:2007:i:6:p:986-1019
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