Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments

52 Pages Posted: 28 Apr 2020 Last revised: 10 Jul 2020

See all articles by Scott R. Baker

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance

R. Farrokhnia

Columbia University - Columbia Business School

Steffen Meyer

University of Southern Denmark - Department of Business and Economics; Danish Finance Institute

Michaela Pagel

Columbia University - Columbia Business School

Constantine Yannelis

University of Chicago, Booth School of Business, Finance, Students

Multiple version iconThere are 2 versions of this paper

Date Written: May 25, 2020

Abstract

The 2020 CARES Act directed cash payments to households. We analyze households’ spending responses using high-frequency transaction data from a FinTech, exploring heterogeneity by income levels, recent income declines, and liquidity. Households respond rapidly to receipt of stimulus payments, with spending increasing by $0.30 per dollar of stimulus during the first month. Households with lower incomes, greater income drops, and lower levels of liquidity display stronger responses highlighting the importance of targeting. Liquidity plays the most important role, with no observed spending response for households with high levels of bank account balances. Relative to the effects of previous economic stimulus programs in 2001 and 2008, we see larger and faster effects overall, smaller increases in durables spending, and larger increases in spending on food, likely reflecting the impact of shelter-in-place orders and supply disruptions. Additionally, we see increases in payments like rents, mortgages, and credit cards reflecting a short-term debt overhang. We formally show that these differences can make direct payments less effective in stimulating aggregate consumption.

Keywords: Consumption, COVID-19, Stimulus, MPC, Household Finance, Transaction Data

JEL Classification: D14, E21, G51

Suggested Citation

Baker, Scott R. and Farrokhnia, R. and Meyer, Steffen and Pagel, Michaela and Yannelis, Constantine, Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments (May 25, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-55, Available at SSRN: https://ssrn.com/abstract=3587894 or http://dx.doi.org/10.2139/ssrn.3587894

Scott R. Baker

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

Evanston, IL 60208
United States

R. Farrokhnia

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Steffen Meyer

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Danish Finance Institute ( email )

Michaela Pagel

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Constantine Yannelis (Contact Author)

University of Chicago, Booth School of Business, Finance, Students ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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