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How Individuals Respond to a Liquidity Shock: Evidence from the 2013 Government Shutdown

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  • Michael Gelman
  • Shachar Kariv
  • Matthew D. Shapiro
  • Dan Silverman
  • Steven Tadelis

Abstract

Using comprehensive account records, this paper examines how individuals adjusted spending and saving in response to a temporary drop in liquidity due to the 2013 U.S. government shutdown. The shutdown cut paychecks by 40% for affected employees, which was recovered within 2 weeks. Because the shutdown affected only the timing of payments, it provides a distinctive experiment allowing estimates of the response to a liquidity shock holding income constant. Spending dropped sharply, implying a naïve estimate of 58 cents less spending for every dollar of lost liquidity. This estimate overstates the consumption response. While many individuals had low liquid assets, they used multiple sources of short-term liquidity to smooth consumption. Sources of short-term liquidity include delaying recurring payments such as for mortgages and credit card balances.

Suggested Citation

  • Michael Gelman & Shachar Kariv & Matthew D. Shapiro & Dan Silverman & Steven Tadelis, 2015. "How Individuals Respond to a Liquidity Shock: Evidence from the 2013 Government Shutdown," NBER Working Papers 21025, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21025
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • 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
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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