Consumer Spending During Unemployment: Positive and Normative Implications

Peter Ganong and Pascal Noel
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Pascal Noel: University of Chicago Booth School of Business

No 2019-006, Working Papers from Human Capital and Economic Opportunity Working Group

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.

Keywords: unemployment; spending; buffer stock; Baily-Chetty (search for similar items in EconPapers)
JEL-codes: E21 E24 J65 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-ias and nep-mac
Note: M
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Citations: View citations in EconPapers (172)

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http://humcap.uchicago.edu/RePEc/hka/wpaper/Ganong ... ing-unemployment.pdf First version, November 29, 2019 (application/pdf)

Related works:
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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Persistent link: https://EconPapers.repec.org/RePEc:hka:wpaper:2019-006

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