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A Model of the Consumption Response to Fiscal Stimulus Payments

  • Gianluca Violante

    (NYU)

  • Greg Kaplan

    (University of Pennsylvania)

Preliminary results show that when this model is parameterized to match a number of targets - in particular the joint cross-sectional distribution of liquid and illiquid wealth - it is able to generate responses to fiscal stimulus payments of the observed order of magnitude. The model is also consistent with two other important facts documented in the empirical literature: 1) household consumption does not respond significantly to large anticipated income changes, and 2) the estimated consumption responses to tax rebates appear to be the result of very high marginal propensities to consume for a minority of households (around 1/4).

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 243.

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Date of creation: 2011
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Handle: RePEc:red:sed011:243
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Andrés Erosa & Gustavo Ventura, 2000. "On Inflation as a Regressive Consumption Tax," UWO Department of Economics Working Papers 20001, University of Western Ontario, Department of Economics.
  2. Jonathan A. Parker, 2011. "Consumer Spending and the Economic Stimulus Payments of 2008," 2011 Meeting Papers 254, Society for Economic Dynamics.
  3. M. Dolores Collado & Martín Browning, 1999. "-The Response Of Expenditures To Anticipated Income Changes: Panel Data Estimates," Working Papers. Serie AD 1999-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  4. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Quantitative Macroeconomics with Heterogeneous Households," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 319-354, 05.
  5. Martin Browning & Thomas F. Crossley, 2000. "The Life Cycle Model of Consumption and Saving," Social and Economic Dimensions of an Aging Population Research Papers 28, McMaster University.
  6. Jeffrey R. Campbell & Zvi Hercowitz, 2009. "Liquidity constraints of the middle class," Working Paper Series WP-09-20, Federal Reserve Bank of Chicago.
  7. Imrohoruglu, Ayse & Prescott, Edward C, 1991. "Seigniorage as a Tax: A Quantitative Evaluation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 462-75, August.
  8. Krueger, Dirk & Kubler, Felix, 2004. "Computing equilibrium in OLG models with stochastic production," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1411-1436, April.
  9. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  10. Annamaria Lusardi & Daniel Schneider & Peter Tufano, 2011. "Financially Fragile Households: Evidence and Implications," CeRP Working Papers 116, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  11. Misra, Kanishka & Surico, Paolo, 2011. "Heterogeneous Responses and Aggregate Impact of the 2001 Income Tax Rebates," CEPR Discussion Papers 8306, C.E.P.R. Discussion Papers.
  12. Fatih Guvenen, 2007. "An empirical investigation of labor income processes," IFS Working Papers W07/13, Institute for Fiscal Studies.
  13. Hyunseung Oh & Ricardo Reis, 2011. "Targeted Transfers and the Fiscal Response to the Great Recession," NBER Working Papers 16775, National Bureau of Economic Research, Inc.
  14. Julia K. Thomas & Aubhik Khan, 2005. "Inflation and Interest Rates with Endogenous Market Segmentation," 2005 Meeting Papers 170, Society for Economic Dynamics.
  15. Xavier Ragot, 2008. "The case for a financial approach to money demand," PSE Working Papers halshs-00586066, HAL.
  16. Heathcote, Jonathan & Perri, Fabrizio & Violante, Giovanni L, 2009. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006," CEPR Discussion Papers 7538, C.E.P.R. Discussion Papers.
  17. Heathcote, Jonathan, 2001. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Papers 01-03, Duke University, Department of Economics.
  18. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  19. Richard Blundell, 2009. "Assessing the Temporary VAT Cut Policy in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 31-38, 03.
  20. Cochrane, John H, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," American Economic Review, American Economic Association, vol. 79(3), pages 319-37, June.
  21. David Card & Raj Chetty & Andrea Weber, 2007. "Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1511-1560.
  22. Telyukova, Irina A., 2012. "Household Need for Liquidity and the Credit Card Debt Puzzle," University of California at San Diego, Economics Working Paper Series qt0ww2c04z, Department of Economics, UC San Diego.
  23. Sydney Ludvigson & Stijn Van Nieuwerburgh & Jack Favilukis, 2010. "The Macroeconomic E¤ects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium," 2010 Meeting Papers 733, Society for Economic Dynamics.
  24. Greg Kaplan & Giovanni L. Violante, 2010. "How Much Consumption Insurance beyond Self-Insurance?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 53-87, October.
  25. Chatterjee, S. & Corbae, D., 1990. "Endogenous Market Participation and the General Equelibrium Value of Money," Working Papers 90-30a, University of Iowa, Department of Economics.
  26. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
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