Consumer Spending During Unemployment: Positive and Normative Implications

Peter Ganong and Pascal J. Noel

No 25417, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using de-identified bank account data, we show that spending drops sharply at the large and predictable decrease in income arising from the exhaustion of unemployment insurance (UI) benefits. We use the high-frequency response to a predictable income decline as a new test to distinguish between alternative consumption models. The sensitivity of spending to income we document is inconsistent with rational models of liquidity-constrained households, but is consistent with behavioral models with present-biased or myopic households. Depressed spending after exhaustion also implies that the consumption-smoothing gains from extending UI benefits are four times larger than from raising UI benefit levels.

JEL-codes: E21 E24 J65 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-ias, nep-lab and nep-mac
Note: EFG LS PE
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Citations: View citations in EconPapers (172)

Published as Peter Ganong & Pascal Noel, 2019. "Consumer Spending during Unemployment: Positive and Normative Implications," American Economic Review, vol 109(7), pages 2383-2424.

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Journal Article: Consumer Spending during Unemployment: Positive and Normative Implications (2019)
Working Paper: Consumer Spending During Unemployment: Positive and Normative Implications (2019)
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