Working Paper: NBER ID: w21025
Authors: 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.
Keywords: liquidity shock; government shutdown; household spending; financial fragility
JEL Codes: D12; D91; E21; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| $1 reduction in liquidity (E41) | 58-cent decrease in spending (H56) |
| reduction in income (E25) | decrease in spending (H56) |
| availability of alternative liquidity sources (G33) | mitigates negative impact of reduced income on spending (D12) |
| restoration of liquidity (G33) | increase in spending (H59) |
| liquidity shock (E44) | drop in spending during week of missed paycheck (D12) |
| chronic low liquid assets (G33) | risk of financial distress (G33) |