Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70495
Authors: 
Agarwal, Sumit
Liu, Chunlin
Souleles, Nicholas S.
Year of Publication: 
2007
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2007-10
Abstract: 
We use a new panel dataset of credit card accounts to analyze how consumers 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 spending increased, counter to the canonical Permanent-Income model. For people whose most intensively used credit card account is in the sample, spending on that account rose by over $200 cumulatively over the nine months after rebate receipt, which represents over 40% of the average household rebate. Because these results relied exclusively on exogenous, randomized variation, they represent compelling evidence of a causal link from the rebate to spending. Further, we found significant heterogeneity in the response to the rebate across different types of consumers. Notably, spending rose most for consumers who were initially most likely to be liquidity constrained according to various criteria, for example consumers who appeared to be initially constrained by their credit limits (before making additional payments). By contrast, debt declined most (so saving rose most) for unconstrained consumers. These results suggest that liquidity constraints are important. More generally, we found 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
Document Type: 
Working Paper

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