The Liquid Hand-to-Mouth: Evidence from Personal Finance Management Software

Arna Olafsson and Michaela Pagel

The Review of Financial Studies, 2018, vol. 31, issue 11, 4398-4446

Abstract: We use a very accurate panel of all individual spending, income, balances, and credit limits from a personal finance software to document spending responses to the arrival of both regular and irregular income. These payday responses are robust and homogeneous for all income and spending categories throughout the income distribution. Moreover, we find that few people hold little or no liquidity. We then analyze whether people hold liquidity cushions to cope with future liquidity constraints. However, we find that peoples’ responses are consistent with standard models without illiquid savings, in which neither present nor future liquidity constraints are frequently binding.Received May 31, 2016; editorial decision September 30, 2017 by Editor Itay Goldstein.

Date: 2018
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The Review of Financial Studies is currently edited by Itay Goldstein

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