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What would you do with $500? Spending responses to gains, losses, news, and loans

Andreas Fuster, Greg Kaplan and Basit Zafar

No 843, Staff Reports from Federal Reserve Bank of New York

Abstract: We use survey questions about spending to investigate features of propensities to consume that are useful for distinguishing between consumption theories. Asking households about their intended spending under various scenarios, we find that 1) responses to unanticipated gains are vastly heterogeneous (either zero or substantially positive), 2) responses to losses are much larger and more widespread than responses to gains, and 3) even those with large responses to gains do not respond to news about future gains. These three findings suggest that limited access to disposable resources is an important determinant of spending behavior. We also find that households do not respond to the offer of a one-year interest-free loan, suggesting it is unlikely that short-term credit constraints drive high propensities to consume. Furthermore, people do cut spending in response to news about future losses, suggesting that even households with limited disposable resources are somewhat forward-looking. A calibrated two-asset life-cycle precautionary savings model can account for these features of propensities to consume, but it cannot explain the positive effect of windfall size, driven by the extensive margin, on spending responses to gains, which suggests that nonconvexities arising from durability, salience, or attention costs may also be important.

Keywords: consumption; savings; marginal propensity to consume; survey (search for similar items in EconPapers)
JEL-codes: D12 D14 E21 (search for similar items in EconPapers)
Date: 2018-03-01
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (31)

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Related works:
Journal Article: What Would You Do with $500? Spending Responses to Gains, Losses, News, and Loans (2021) Downloads
Working Paper: What Would You Do With $500? Spending Responses to Gains, Losses, News and Loans (2018) Downloads
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