What Would You Do With $500? Spending Responses to Gains, Losses, News, and Loans

65 Pages Posted: 7 Mar 2018

See all articles by Andreas Fuster

Andreas Fuster

Swiss National Bank - Financial Stability

Greg Kaplan

University of Chicago - Department of Economics

Basit Zafar

Arizona State University

Multiple version iconThere are 2 versions of this paper

Date Written: March , 2018

Abstract

We use survey questions about spending to investigate features of propensities to consume that are useful for distinguishing between consumption theories. Asking households about their intended spending under various scenarios, we find that 1) responses to unanticipated gains are vastly heterogeneous (either zero or substantially positive), 2) responses to losses are much larger and more widespread than responses to gains, and 3) even those with large responses to gains do not respond to news about future gains. These three findings suggest that limited access to disposable resources is an important determinant of spending behavior. We also find that households do not respond to the offer of a one-year interest-free loan, suggesting it is unlikely that short-term credit constraints drive high propensities to consume. Furthermore, people do cut spending in response to news about future losses, suggesting that even households with limited disposable resources are somewhat forward-looking. A calibrated two-asset life-cycle precautionary savings model can account for these features of propensities to consume, but it cannot explain the positive effect of windfall size, driven by the extensive margin, on spending responses to gains, which suggests that nonconvexities arising from durability, salience, or attention costs may also be important.

Keywords: consumption, savings, marginal propensity to consume, survey

JEL Classification: D12, D14, E21

Suggested Citation

Fuster, Andreas and Kaplan, Greg and Zafar, Basit, What Would You Do With $500? Spending Responses to Gains, Losses, News, and Loans (March , 2018). FRB of New York Staff Report No. 843, Available at SSRN: https://ssrn.com/abstract=3135283 or http://dx.doi.org/10.2139/ssrn.3135283

Andreas Fuster (Contact Author)

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Greg Kaplan

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

Basit Zafar

Arizona State University ( email )

WP Carey School of Business, ASU
Tempe, AZ 85287
United States
9179326564 (Phone)

HOME PAGE: http://https://sites.google.com/site/basitakzafar/

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