Income Changes and Consumption: Evidence from the 2013 Federal Government Shutdown

49 Pages Posted: 9 Mar 2015

See all articles by Scott R. Baker

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance

Constantine Yannelis

New York University Leonard N. Stern School of Business; University of Chicago Booth School of Business

Date Written: March 8, 2015

Abstract

We use the 2013 federal government shutdown and a rich data set from an online personal finance website to study the effects of changes in income on changes in consumption. The 2013 shutdown represented a significant and unanticipated income shock for federal government workers, with no direct effect on permanent income. We exploit both the differences between unaffected state employees and affected federal employees as well as between federal employees required to remain at work and those required to stay at home to generate variation in income and leisure time. We find strong evidence for excess sensitivity of consumption patterns, violating the permanent income hypothesis. We demonstrate that this decline in spending can be largely explained by increased home production, changes in spending allocations, and credit constraints. We are able to discern detailed categories of household spending with widely varying elasticities. The results demonstrate the importance of household liquidity, leisure and home production when constructing stimulus or social insurance policy.

Keywords: consumption, income, shutdown, home production, credit, liquidity

JEL Classification: E21, E64, H31

Suggested Citation

Baker, Scott R. and Yannelis, Constantine, Income Changes and Consumption: Evidence from the 2013 Federal Government Shutdown (March 8, 2015). Available at SSRN: https://ssrn.com/abstract=2575461 or http://dx.doi.org/10.2139/ssrn.2575461

Scott R. Baker (Contact Author)

Northwestern University, Kellogg School of Management, Department of Finance ( email )

Evanston, IL 60208
United States

Constantine Yannelis

New York University Leonard N. Stern School of Business ( email )

Suite 9-160
New York, NY
United States

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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