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

66 Pages Posted: 28 Apr 2020 Last revised: 16 Sep 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

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Date Written: September 15, 2020

Abstract

The 2020 CARES Act directed large cash payments to households. We analyze house-holds’ spending responses using high-frequency transaction data from a Fintech non-profit, exploring heterogeneity by income levels, recent income declines, and liquidity as well as linked survey responses about economic expectations. Households respond rapidly to the receipt of stimulus payments, with spending increasing by $0.25-$0.40 per dollar of stimulus during the first weeks. Households with lower incomes, greater income drops, and lower lev-els of liquidity display stronger responses highlighting the importance of targeting. Liquidity plays the most important role, with no significant spending response for households with large checking account balances. Households that expect employment losses and benefit cuts dis-play weaker responses to the stimulus. Relative to the effects of previous economic stimulus programs in 2001 and 2008, we see faster effects, smaller increases in durables spending, larger increases in spending on food, and substantial 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 (September 15, 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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