Liquidity or Wealth? Consumption, Debt, and Financial Fragility After a Windfall

Andre Brunelli, Bruno Martins and Carlos Carvalho

No 634, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper examines how individual consumers adjust consumption and debt in response to a large, exogenous financial windfall, using Brazil’s 2017 FGTS reform, which allowed early access to previously illiquid severance fund balances. Leveraging rich administrative data linking credit registry and labor records, we use a difference-in-differences design exploiting quasi-exogenous eligibility timing based on birth month. We decompose the shock into liquidity and wealth components: the liquidity channel reflects early access to illiquid savings, while the wealth component arises from the present-value gain due to FGTS yields being persistently below market interest rates. Credit-constrained individuals primarily used the funds to reduce debt and lower default risk, while unconstrained consumers increased credit-financed spending, raising financial fragility. Liquidity components drove deleveraging and stability, whereas wealth components led to durable consumption and greater credit exposure. These results provide rare empirical validation of key Heterogeneous Agent New Keynesian (HANK) mechanisms and offer policy-relevant insights into how the composition of financial transfers influences consumer behavior and financial stability.

Date: 2025-11
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-inv
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/WP634.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:634

Access Statistics for this paper

More papers in Working Papers Series from Central Bank of Brazil, Research Department
Bibliographic data for series maintained by Rodrigo Barbone Gonzalez ().