TY  - JOUR
AU  - Kaplan,Greg
AU  - Violante,Giovanni L.
TI  - A Model of the Consumption Response to Fiscal Stimulus Payments
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17338
PY  - 2011
Y2  - August 2011
UR  - http://www.nber.org/papers/w17338
L1  - http://www.nber.org/papers/w17338.pdf
N1  - Author contact info:
Greg Kaplan
Department of Economics
Princeton University
Fisher Hall
Princeton, NJ 08544
Tel: 609/258-4000
Fax: 609/258-6419
E-Mail: gkaplan@princeton.edu

Giovanni L. Violante
Department of Economics
New York University
19 W. 4th Street
New York, NY 10012-1119
Tel: 212/992-9771
Fax: 212/995-3932
E-Mail: glv2@nyu.edu
AB  - A wide body of empirical evidence, based on randomized experiments, finds that 20-40 percent of fiscal stimulus payments (e.g. tax rebates) are spent on nondurable household consumption in the quarter that they are received. We develop a structural economic model to interpret this evidence. Our model integrates the classical Baumol-Tobin model of money demand into the workhorse incomplete-markets life-cycle economy. In this framework, households can hold two assets: a low-return liquid asset (e.g., cash, checking account) and a high-return illiquid asset (e.g., housing, retirement account) that carries a transaction cost. The optimal life-cycle pattern of wealth accumulation implies that many households are  "wealthy hand-to-mouth" : they hold little or no liquid wealth despite owning sizeable quantities of illiquid assets. They therefore display large propensities to consume out of additional income. We document the existence of such households in data from the Survey of Consumer Finances. A version of the model parameterized to the 2001 tax rebate episode is able to generate consumption responses to fiscal stimulus payments that are in line with the data.
ER  -