DP15918 Less is More: Consumer Spending and the Size of Economic Stimulus Payments

Author(s): Michele Andreolli, Paolo Surico
Publication Date: March 2021
Date Revised: April 2021
Keyword(s): economic stimulus payment size, liquidity constraints, MPC heterogeneity, non-essential spending, non-homothetic preferences
JEL(s): D12, D14, E21, E62, H23
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15918

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.