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Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore

77 Pages Posted: 4 Apr 2013 Last revised: 24 Jul 2014

Sumit Agarwal

Georgetown University - Department of Finance

Wenlan Qian

National University of Singapore - NUS Business School

Date Written: July 4, 2014

Abstract

This paper uses a unique panel dataset of consumer financial transactions to study how consumers respond to an exogenous unanticipated income shock. Consumption rose significantly after the fiscal policy announcement: during the ten subsequent months, for each dollar received, consumers on average spent 80 cents. We find a strong announcement effect — 19% of the response occurs during the first two-month announcement period via credit cards. Subsequently, consumers switched to debit cards after disbursement before finally increasing spending on credit cards in the later months. Consumers with low liquid assets or with low credit card limit experienced stronger consumption responses.

Keywords: Consumption, Spending, Debt, Credit Cards, Household Finance, Banks, Loans, Durable Goods, Discretionary Spending, Fiscal Policy, Tax Rebates, Liquidity Constraints, Credit Constraints, Precautionary Savings, Anticipated and Unanticipated Income Shocks, Announcement Effects.

JEL Classification: D12, D14, D91, E21, E51, E62, G21, H31

Suggested Citation

Agarwal, Sumit and Qian, Wenlan, Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore (July 4, 2014). Available at SSRN: https://ssrn.com/abstract=2245351 or http://dx.doi.org/10.2139/ssrn.2245351

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Wenlan Qian (Contact Author)

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

HOME PAGE: http://sites.google.com/site/wenlanqian/

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