NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Spending Less After (Seemingly) Bad News

Mark Garmaise, Yaron Levi, Hanno Lustig

NBER Working Paper No. 27010
Issued in April 2020
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth

We show that household consumption displays excess sensitivity to salient macro-economic news, even when the news is not real. When the announced local unemployment rate reaches a 12-month maximum, local consumers in that area reduce discretionary spending by 2% relative to consumers in areas with the same macro-economic fundamentals. The consumption of low-income households displays greater excess sensitivity to salience. The decrease in spending is not reversed in subsequent months; instead, negative news persistently reduces future spending for two to four months. Announcements of 12-month unemployment maximums also lead consumers to reduce their credit card repayments by 3.6%. Households in treated areas act as if they are more financially constrained than those in untreated areas with the same fundamentals.

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Document Object Identifier (DOI): 10.3386/w27010

 
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