Working Paper: NBER ID: w25086
Authors: Brian Baugh; Itzhak Bendavid; Hoonsuk Park; Jonathan A. Parker
Abstract: Analyzing account-level data from an account aggregator, we find that households increase consumption when they receive (expected) tax refunds, as if they face liquidity constraints. However, these same households smooth consumption when making payments in other years, primarily by transferring funds among liquid accounts. Even households carrying credit card debt smooth consumption when making payments, and even highly-liquid households spend out of refunds. This behavior is inconsistent with pure liquidity constraints or hand-to-mouth behavior and most consistent with a mental accounting life-cycle model.
Keywords: Consumption Smoothing; Tax Refunds; Liquidity Constraints; Mental Accounting
JEL Codes: D12; E21; G4; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expected tax refunds (H26) | Increase in consumption spending (E20) |
| Anticipated payments (D84) | No reduction in consumption spending (E21) |
| Receipt of expected income (E25) | Consumption behavior (D10) |
| Account transfers before payments (F16) | Consumption smoothing (D15) |
| Low liquidity households (G59) | Consumption smoothing without reducing spending (D15) |