Working Paper: NBER ID: w17338
Authors: Greg Kaplan; Giovanni L. Violante
Abstract: A wide body of empirical evidence finds that around 25 percent of fiscal stimulus payments (e.g., tax rebates) are spent on nondurable household consumption in the quarter that they are received. To interpret this fact, we develop a structural economic model where households can hold two assets: a low-return liquid asset (e.g., cash, checking account) and a high-return illiquid asset that carries a transaction cost (e.g., housing, retirement account). The optimal life-cycle pattern of portfolio choice implies that many households in the model are "wealthy hand-to-mouth": they hold little or no liquid wealth despite owning sizeable quantities of illiquid assets. They therefore display large propensities to consume out of additional transitory income, and small propensities to consume out of news about future income. We document the existence of such households in data from the Survey of Consumer Finances. A version of the model parameterized to the 2001 tax rebate episode yields consumption responses to fiscal stimulus payments that are in line with the evidence, and an order of magnitude larger than in the standard "one-asset" framework. The model's nonlinearities with respect to the size of the rebate, its degree of phasing-out, and aggregate economic conditions have implications for policy design.
Keywords: Consumption; Fiscal Stimulus; Tax Rebates; Household Behavior; Marginal Propensity to Consume
JEL Codes: D31; D91; E21; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal stimulus payments (E62) | Household consumption (D10) |
| Wealthy hand-to-mouth households (G59) | High marginal propensity to consume out of fiscal stimulus payments (E62) |
| Unexpected fiscal stimulus payments (E62) | Marginal propensity to consume (MPC) (E21) |
| Anticipated fiscal stimulus payments (E62) | Marginal propensity to consume (MPC) (E21) |
| Presence of wealthy hand-to-mouth households (D19) | Overall consumption response to fiscal stimulus (E20) |
| Rebate coefficient (C29) | Fraction of rebate consumed (D15) |