The Reaction of Consumer Spending and Debt to Tax Rebates -- Evidence from Consumer Credit Data

Sumit Agarwal (), Chunlin Liu and Nicholas S Souleles

No 13694, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use a new panel dataset of credit card accounts to analyze how consumers responded to the 2001 Federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards their spending increased, counter to the canonical Permanent-Income model. Spending rose most for consumers who were initially most likely to be liquidity constrained, whereas debt declined most (so saving rose most) for unconstrained consumers. More generally, the results suggest that there can be important dynamics in consumers' response to "lumpy" increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms.

JEL-codes: D91 E21 E51 E62 G2 H31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2007-12
Note: EFG PE
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Related works:
Working Paper: The reaction of consumer spending and debt to tax rebates – evidence from consumer credit data (2007)
Working Paper: The reaction of consumer spending and debt to tax rebates; evidence from consumer credit data (2007)
Journal Article: The Reaction of Consumer Spending and Debt to Tax Rebates-Evidence from Consumer Credit Data (2007)
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