How Individuals Respond to a Liquidity Shock: Evidence from the 2013 Government Shutdown

52 Pages Posted: 16 Mar 2015 Last revised: 26 Feb 2019

See all articles by Michael Gelman

Michael Gelman

Claremont McKenna College; University of Michigan at Ann Arbor - Survey Research Center

Shachar Kariv

University of California, Berkeley - Department of Economics

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Dan Silverman

University of Michigan at Ann Arbor - Economics Department; National Bureau of Economic Research (NBER)

Steven Tadelis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: March 2015

Abstract

Using comprehensive account records, this paper examines how individuals adjusted spending and saving in response to a temporary drop in liquidity due to the 2013 U.S. government shutdown. The shutdown cut paychecks by 40% for affected employees, which was recovered within 2 weeks. Because the shutdown affected only the timing of payments, it provides a distinctive experiment allowing estimates of the response to a liquidity shock holding income constant. Spending dropped sharply, implying a naïve estimate of 58 cents less spending for every dollar of lost liquidity. This estimate overstates the consumption response. While many individuals had low liquid assets, they used multiple sources of short-term liquidity to smooth consumption. Sources of short-term liquidity include delaying recurring payments such as for mortgages and credit card balances.

Suggested Citation

Gelman, Michael and Kariv, Shachar and Shapiro, Matthew D. and Silverman, Dan and Tadelis, Steven, How Individuals Respond to a Liquidity Shock: Evidence from the 2013 Government Shutdown (March 2015). NBER Working Paper No. w21025, Available at SSRN: https://ssrn.com/abstract=2578873

Michael Gelman (Contact Author)

Claremont McKenna College ( email )

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University of Michigan at Ann Arbor - Survey Research Center ( email )

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Shachar Kariv

University of California, Berkeley - Department of Economics ( email )

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Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics ( email )

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Dan Silverman

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Steven Tadelis

University of California, Berkeley - Haas School of Business ( email )

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