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The reaction of consumer spending and debt to tax rebates; evidence from consumer credit data

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Listed:
  • Sumit Agarwal
  • Chunlin Liu
  • Nicholas S. Souleles

Abstract

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

Suggested Citation

  • Sumit Agarwal & Chunlin Liu & Nicholas S. Souleles, 2007. "The reaction of consumer spending and debt to tax rebates; evidence from consumer credit data," Working Papers 07-34, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:07-34
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    References listed on IDEAS

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    More about this item

    Keywords

    Taxation; Consumer credit;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • 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; Modern Monetary Theory
    • G2 - Financial Economics - - Financial Institutions and Services
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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