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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

The authors use a new panel data set of credit card accounts to analyze how consumers responded to the 2001 federal income tax rebates. They estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. They 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 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. ; Also issued as Payment Cards Center Discussion Paper No. 07-18

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 07-34.

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Date of creation: 2007
Date of revision:
Handle: RePEc:fip:fedpwp:07-34
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  1. T. Jappelli & J-S Pischke & N.S. Souleles, 1995. "Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources," Working papers 95-19, Massachusetts Institute of Technology (MIT), Department of Economics.
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