A Model Of The Consumption Response To Fiscal Stimulus Payments

A wide body of empirical evidence, based on randomized experiments, finds that 20-40 percent of fiscal stimulus payments (e.g. tax rebates) are spent on nondurable household consumption in the quarter that they are received. The authors develop a structural economic model to interpret this evidence. Their model integrates the classical Baumol-Tobin model of money demand into the workhorse incomplete-markets life-cycle economy. In this framework, households can hold two assets: a low-return liquid asset (e.g., cash, checking account) and a high-return illiquid asset (e.g., housing, retirement account) that carries a transaction cost.

Provided by: National Bureau of Economic Research Topic: CXO Date Added: Aug 2011 Format: PDF

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