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Less is More: Consumer Spending and the Size of Economic Stimulus Payments

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  • Surico, Paolo
  • Andreolli, Michele

Abstract

We study the consumption response to unexpected transitory income gains of different size, using hypothetical questions from the Italian Survey of Household Income and Wealth. Families with low cash-on-hand display a higher Marginal Propensity to Consume (MPC) out of the small gains while affluent households exhibit a higher MPC out of the large gains. The spending behaviour of low-income families is consistent with the predictions of models with borrowing constraints and uninsurable income risk whereas the consumption pattern of higher earners can be accounted for by non-homothetic preferences on non-essentials. Our results suggest that, for a given level of public spending, a fiscal transfer of smaller size paid to a larger group of low-income households stimulates aggregate consumption more than a larger transfer paid to a smaller group.

Suggested Citation

  • Surico, Paolo & Andreolli, Michele, 2021. "Less is More: Consumer Spending and the Size of Economic Stimulus Payments," CEPR Discussion Papers 15918, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15918
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    2. Savoia, Ettore, 2023. "The effects of labor income risk heterogeneity on the marginal propensity to consume," Working Paper Series 2866, European Central Bank.
    3. Ahmad Zia Wahdat, 2022. "Economic Impact Payments and Household Food Insufficiency during COVID-19: The Case of Late Recipients," Economics of Disasters and Climate Change, Springer, vol. 6(3), pages 451-469, November.
    4. Albuquerque, Bruno & Green, Georgina, 2023. "Financial concerns and the marginal propensity to consume in COVID times: Evidence from UK survey data," Journal of Macroeconomics, Elsevier, vol. 78(C).
    5. Bernard, René, 2022. "Mental Accounting and the Marginal Propensity to Consume," VfS Annual Conference 2022 (Basel): Big Data in Economics 264186, Verein für Socialpolitik / German Economic Association.
    6. Cantore, Cristiano & Ferroni, Filippo & Mumtaz, Hroon & Theophilopoulou, Angeliki, 2022. "A tail of labour supply and a tale of monetary policy," Bank of England working papers 989, Bank of England.
    7. J r my Boccanfuso, 2022. "Consumption Response Heterogeneity and Dynamics with an Inattention Region," Working Papers wp1172, Dipartimento Scienze Economiche, Universita' di Bologna.
    8. Bernard, René, 2023. "Mental accounting and the marginal propensity to consume," Discussion Papers 13/2023, Deutsche Bundesbank.

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    More about this item

    Keywords

    Economic stimulus payment size; Mpc heterogeneity; Liquidity constraints; Non-homothetic preferences; Non-essential spending;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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