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Title: Consumer Responses to Fiscal Stimulus Policy and Households? Cost of Liquidity

Author(s): Claus T. Kreiner, David Dreyer Lassen and Søren Leth-Petersen

Publication Date: September 2012

Keyword(s): consumption behavior, fiscal policy and liquidity constraints

Programme Area(s): Public Economics

Abstract: Consumption theory predicts that the cost of liquidity determines spending responses to a stimulus. We test this hypothesis directly using administrative records of individual-level loan and deposit accounts in combination with a Danish fiscal stimulus reform transforming illiquid pension wealth into liquid wealth. The data reveal substantial variation in the cost of liquidity across households, and this cost robustly predicts the propensity to spend. We find that the heterogeneity across households cannot be explained by short-lived shocks appearing within the duration of a typical business cycle but show that it is consistent with liquidity constraints being self-imposed by impatient types.

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Bibliographic Reference

Kreiner, C, Lassen, D and Leth-Petersen, S. 2012. 'Consumer Responses to Fiscal Stimulus Policy and Households? Cost of Liquidity'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9161