TY  - JOUR
AU  - Agarwal,Sumit
AU  - Liu,Chunlin
AU  - Souleles,Nicholas S.
TI  - The Reaction of Consumer Spending and Debt to Tax Rebates -- Evidence from Consumer Credit Data
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13694
PY  - 2007
Y2  - December 2007
UR  - http://www.nber.org/papers/w13694
L1  - http://www.nber.org/papers/w13694.pdf
N1  - Author contact info:
Sumit Agarwal
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604
Tel: 312/322-5973
E-Mail: ushakri@yahoo.com

Chunlin Liu
Department of Managerial Sciences
University of Nevada, Reno
Reno, NV 89557
E-Mail: liuc@unr.edu

Nicholas S. Souleles
Finance Department
The Wharton School
2300 SH-DH
University of Pennsylvania
Philadelphia, PA  19104-6367
Tel: 215/898-9466
Fax: 215/898-6200
E-Mail: souleles@wharton.upenn.edu
AB  - 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 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.
ER  -