Less is More: Consumer Spending and the Size of Economic Stimulus Payments

Paolo Surico and Michele Andreolli

No 15918, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the consumption response to unexpected transitory income gains of different size, using hypothetical questions from the Italian Survey of Household Income and Wealth. Families with low cash-on-hand display a higher Marginal Propensity to Consume (MPC) out of the small gains while affluent households exhibit a higher MPC out of the large gains. The spending behaviour of low-income families is consistent with the predictions of models with borrowing constraints and uninsurable income risk whereas the consumption pattern of higher earners can be accounted for by non-homothetic preferences on non-essentials. Our results suggest that, for a given level of public spending, a fiscal transfer of smaller size paid to a larger group of low-income households stimulates aggregate consumption more than a larger transfer paid to a smaller group.

Keywords: Economic stimulus payment size; Mpc heterogeneity; Liquidity constraints; Non-homothetic preferences; Non-essential spending (search for similar items in EconPapers)
JEL-codes: D12 D14 E21 E62 H23 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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