Discussion Paper Details

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Title: Less is More: Consumer Spending and the Size of Economic Stimulus Payments

Author(s): Michele Andreolli and Paolo Surico

Publication Date: March 2021

Keyword(s): economic stimulus payment size, liquidity constraints, MPC heterogeneity, non-essential spending and non-homothetic preferences

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We study the consumption response to unexpected transitory income gains of different size, using hypothetical questions from the Italian Survey of Household Income and Wealth. Families with low cash-on-hand display a higher Marginal Propensity to Consume (MPC) out of the small gains while affluent households exhibit a higher MPC out of the large gains. The spending behaviour of low-income families is consistent with the predictions of models with borrowing constraints and uninsurable income risk whereas the consumption pattern of higher earners can be accounted for by non-homothetic preferences on non-essentials. Our results suggest that, for a given level of public spending, a fiscal transfer of smaller size paid to a larger group of low-income households stimulates aggregate consumption more than a larger transfer paid to a smaller group.

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Bibliographic Reference

Andreolli, M and Surico, P. 2021. 'Less is More: Consumer Spending and the Size of Economic Stimulus Payments'. London, Centre for Economic Policy Research.