How individuals respond to a liquidity shock: Evidence from the 2013 government shutdown

Michael Gelman, Shachar Kariv, Matthew Shapiro, Dan Silverman and Steven Tadelis

Journal of Public Economics, 2020, vol. 189, issue C

Abstract: Using comprehensive account records, this paper examines how individuals adjusted spending and saving in response to a temporary drop in liquidity due to the 2013 U.S. government shutdown. The shutdown cut paychecks by 40% for affected employees, which was recovered within 2 weeks. Because the shutdown affected only the timing of payments, it provides a distinctive experiment allowing estimates of the response to a liquidity shock holding income constant. Spending dropped sharply, implying a naïve estimate of 58 cents less spending for every dollar of lost liquidity. This estimate overstates the consumption response. While many individuals had low liquid assets, they used multiple sources of short-term liquidity to smooth consumption. Sources of short-term liquidity include delaying recurring payments such as for mortgages and credit card balances.

Keywords: Consumption; Spending; Liquidity; Fiscal policy; Marginal propensity to spend; Account data; Naturally-occurring data (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (13)

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Working Paper: How Individuals Respond to a Liquidity Shock: Evidence from the 2013 Government Shutdown (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:189:y:2020:i:c:s004727271830118x

DOI: 10.1016/j.jpubeco.2018.06.007

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