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Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model? (Working Paper 2011-02)

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  • Jonathan Huntley
  • Valentina Michelangeli

Abstract

This paper presents a life-cycle model with earnings risk, liquidity constraints, and portfolio choice over tax-deferred and taxable assets to evaluate changes to household consumption in response to transitory, anticipated income shocks, such as the 2001 federal income tax rebate. Households optimally hold a large share of savings in tax-deferred assets, which are encumbered by withdrawal penalties, and choose to relinquish some taxable precautionary savings in exchange for higher after-tax returns. The model predicts an increase of several percentage points in the

Suggested Citation

  • Jonathan Huntley & Valentina Michelangeli, 2011. "Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model? (Working Paper 2011-02)," Working Papers 41581, Congressional Budget Office.
    • Handle: RePEc:cbo:wpaper:41581
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    File URL: https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/workingpaper/07-14-11-wp-2011-02-taxrebateconsumptionmodel_1.pdf
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    References listed on IDEAS

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    Cited by:

    1. Alisdair McKay & Ricardo Reis, 2016. "The Role of Automatic Stabilizers in the U.S. Business Cycle," Econometrica, Econometric Society, vol. 84, pages 141-194, January.

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