Spending Responses to Fiscal Policies

This research proposal aims to investigate consumer behavior in response to anticipated and realized income changes, focusing on the effects of fiscal policy interventions such as direct cash transfers. This project addresses key gaps in the literature regarding the marginal propensity to consume (MPC), particularly in high-income individuals who are not liquidity constrained. The project is divided into two main parts:
Part 1 examines consumer responses to predictable increases and decreases in after-tax income, using high-frequency financial transaction data. Specifically, it focuses on how high-income individuals adjust their consumption when their payroll taxes stop due to reaching the Social Security cap, and when those taxes are reinstated at the start of the new year. The aim is to determine whether the same households that respond to income increases also adjust to income declines, thus testing for asymmetries in MPC and challenging existing consumption theories.

Part 2 studies anticipatory spending behavior, analyzing whether individuals adjust their consumption before they actually receive fiscal stimulus payments or other income receipts. Using data on stimulus checks from the CARES Act, state-level fiscal payments, and other federal policies, the project will test whether consumers increase spending when they learn about future income changes, as predicted by forward-looking models, or if they wait until the payments arrive.

The project contributes to modern consumer theory by testing the validity of models like the Life-Cycle/Permanent Income Hypothesis, which predict little response to predictable income changes. Additionally, it examines whether the same consumers show "excess sensitivity" by failing to smooth consumption over time as they anticipate or experience income fluctuations. This is particularly relevant for policies aimed at economic stabilization and poverty alleviation, where understanding individual consumption behavior is crucial.

Key Contributions:

- The first part contributes to the literature by studying settings with predictable income decreases, a rare but important area for distinguishing between different theories of consumption.

- The second part contributes by leveraging high-quality financial data to estimate anticipatory spending responses, a novel approach that challenges existing research, which focuses on consumption responses to income receipt.

- The project also tests the joint distribution of MPCs within individuals, which can provide insights into whether liquidity constraints or other factors explain differences in behavior across income increases and decreases.

Research Impact: The project will improve our understanding of the effectiveness of fiscal policies, informing both academic debates and policymaking. By investigating how high-income individuals respond to both anticipated and realized income changes, the study will offer valuable insights into the broader macroeconomic effects of fiscal stimuli. These findings are relevant to policymakers who design interventions to stimulate aggregate demand and increase welfare, particularly among vulnerable groups.

Ongoing Research and Collaborations: In Switzerland, no similar research is underway, although the project will benefit from discussions with economists involved in related fields, such as Prof. Winfried Koeniger, Prof. Raphael Lalive, and Prof. Andreas Fuster. Internationally, several projects address related questions about consumption responses to income changes, but the project's unique focus on anticipated income declines and anticipatory spending behavior sets it apart.

Dissemination: The findings will be published in top-tier academic journals, such as The American Economic Review and The Journal of Monetary Economics.