Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore
Georgetown University - Department of Finance
National University of Singapore - NUS Business School
July 4, 2014
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.
Number of Pages in PDF File: 77
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
Date posted: April 4, 2013 ; Last revised: July 24, 2014