Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25536
Authors: 
Lusardi, Annamaria
Mitchell, Olivia S.
Year of Publication: 
2007
Series/Report no.: 
CFS Working Paper 2008/01
Abstract: 
We use a new panel dataset of credit card accounts to analyze how consumer responded to the 2001 Federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards their spending increased, counter to the canonical Permanent-Income model. Spending rose most for consumers who were initially most likely to be liquidity constrained, whereas debt declined most (so saving rose most) for unconstrained consumers. More generally, the results suggest that there can be important dynamics in consumers’ response to “lumpy” increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms.
Subjects: 
Consumption
Saving
Life-Cycle Model
Permanent-Income Hypothesis
Liquidity Constraints
Fiscal Policy
Tax Cuts
Tax Rebates
Windfalls
Credit Cards
Consumer Credit
Consumer Balance Sheets
Household Finance
JEL: 
D91
E21
E51
E62
G2
H31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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