How Effective are Universal Payments for Raising Consumption? Evidence from a Natural Experiment

36 Pages Posted: 3 May 2021 Last revised: 22 Nov 2021

See all articles by Seungjun Baek

Seungjun Baek

Sejong University - Department of Economics

Seongeun Kim

Sejong University

Tae-hwan Rhee

Sejong University, Department of Economics

Wonmun Shin

Sejong University - Department of Economics

Date Written: April 30, 2021

Abstract

We investigate the impact of the universal stimulus payments (100-350 thousand KRW per person) distributed by the largest Korean province of Gyeonggi under the COVID-19 pandemic on household consumption using large-scale credit and debit card data from the Korea Credit Bureau. As the neighboring Incheon metropolitan city did not distribute stimulus payments, we employ a difference-in-difference approach and find that the stimulus payments increased monthly consumption per person by approximately 30 thousand KRW within the first 20 days. The overall MPC of the payments was approximately 0.40 for single families. The MPC decreased from 0.58 to 0.36 as the transfer size increased from 100-150 to 300-350 thousand KRW. We also find that universal payments had a very heterogeneous effect on different groups of people. The MPC for liquidity-constrained households, which account for 8% of residents, was close to one, but the MPCs of the other household groups were not significantly different from zero. The unconditional quantile treatment effect estimates reveal that there was a positive and significant increase in monthly consumption only on the lower part of the distribution below the median. Our results show that a more targeted approach may more efficiently achieve the policy goal of boosting aggregate demand.

Keywords: COVID-19, Stimulus Payments, Consumption, Marginal Propensity to Consume, Difference-in-Difference

JEL Classification: D12, E21, E62, H24

Suggested Citation

Baek, Seungjun and Kim, Seongeun and Rhee, Tae-hwan and Shin, Wonmun, How Effective are Universal Payments for Raising Consumption? Evidence from a Natural Experiment (April 30, 2021). Available at SSRN: https://ssrn.com/abstract=3838445 or http://dx.doi.org/10.2139/ssrn.3838445

Seungjun Baek

Sejong University - Department of Economics ( email )

143-743 Seoul
Korea, Republic of (South Korea)

Seongeun Kim (Contact Author)

Sejong University ( email )

209 Neungdong-ro, Gwangjin-gu
Seoul, 05006
Korea, Republic of (South Korea)

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

Tae-hwan Rhee

Sejong University, Department of Economics ( email )

209 Neungdong-ro, Gwangjin-gu
Seoul, 05006
Korea, Republic of (South Korea)
+82-2-6935-2474 (Phone)

HOME PAGE: http://home.sejong.ac.kr/~thrhee/

Wonmun Shin

Sejong University - Department of Economics ( email )

143-743 Seoul
Korea, Republic of (South Korea)

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