Working Paper: CEPR ID: DP9161
Authors: Claus Thustrup Kreiner; David Dreyer Lassen; Sren Lethpetersen
Abstract: Consumption theory predicts that the cost of liquidity determines spending responses to a stimulus. We test this hypothesis directly using administrative records of individual-level loan and deposit accounts in combination with a Danish fiscal stimulus reform transforming illiquid pension wealth into liquid wealth. The data reveal substantial variation in the cost of liquidity across households, and this cost robustly predicts the propensity to spend. We find that the heterogeneity across households cannot be explained by short-lived shocks appearing within the duration of a typical business cycle but show that it is consistent with liquidity constraints being self-imposed by impatient types.
Keywords: consumption behaviour; fiscal policy; liquidity constraints
JEL Codes: H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Heterogeneity in spending responses (D12) | Persistent differences in liquidity demand (E41) |
| Households' marginal cost of liquidity (G59) | Propensity to spend stimulus (D12) |
| Marginal cost of liquidity (E41) | Consumption behavior (D10) |