Heterogeneity in the Marginal Propensity to Consume: Evidence from Covid-19 Stimulus Pay

Abstract

We identify 16,016 recipients of Covid-19 Economic Impact Payments in anonymized transaction-level debit card data from Facteus. We use an event study framework to show that in the two weeks following a sudden $1,200 payment from the IRS, consumers immediately increased spending by an average of $577, implying a marginal propensity to consume (MPC) of 48%. Consumer spending falls back to normal levels after two weeks. Stimulus recipients who live paycheck-to-paycheck spend 68% of the stimulus payment immediately, while recipients who save much of their monthly income spend 23% of the stimulus payment immediately. Consumer age and location are only marginally correlated with individual MPCs after controlling for each individual's pre-pandemic propensity to save. We use the 2018 American Community Survey to re-weight our data to match the U.S. population. Ignoring equilibrium effects and assuming a constant MPC for each person, we estimate that the CARES Act's $296 billion of payments to individuals will increase consumer spending by $138 billion (47% of total outlays). A stimulus bill of the same size targeted at individuals with the highest MPCs would have instead increased consumer spending by $201 billion (68% of total outlays).

The Marginal Propensity to Consume of 2020 COVID-19 Stimulus Payments in Peru

“…While the circumstances of these two household types are different, they have similar challenges due to liquidity. There is an inverse relationship between household liquidity and the MPC resulting from a stimulus payment as households with low liquidity tend to have higher MPCs (Armantier et al, 2021;Baker et al, 2020;Coibion et al, 2020;Karger & Rajan, 2021). Studies from the United States on the 2001 and 2008 stimulus exhibited similar relationships between liquidity and MPC (Parker, Souleles, Johnson, & McClelland, 2013).…”

“…There exists a significant base of information and research on the MPC that arises from stimulus payments. Recently, studies from 2020 and 2021 about the MPC resulting from stimulus payments in the United States (Economic Impact Payments) provide many examples of how MPC can be measured, the challenges of measuring it, and the heterogeneity amongst subsidy recipients' reactions to receiving payments (Armantier, Goldman, Kosar, & van der Klaauw, 2021;Baker, Foarrokhnia, Meyer, Pagel, & Yannelis, 2020;Coibion, Gorodnichenko, & Weber, 2020;Karger & Rajan, 2021). These studies all demonstrated that government stimulus has varying effects on spending that depend on an individual's or household's economic situation.…”

“…andBaker et al (2020) used transaction data from personal finance companies Coibion et al (2020). used data from a software company Facteus Karger and Rajan (2021). used survey data from the Neilson Homescan and Armantier et al (2021) used the Consumer Expectations Survey.…”

Unemployment Insurance benefit reduction and food hardship

“…Several studies have examined the effect of the stimulus payment passed under the CARES Act on consumer spending and saving behavior. The marginal propensity to spend out of the stimulus payment is found to be inversely related to household income (Chetty et al, 2020;Karger & Rajan, 2021;Sahm et al, 2020) and expectations of future negative income shocks such as job loss and UI benefit reduction (Baker et al, 2020), but positively related to local cost of living (Misra et al, 2021).…”

Some inflationary scenarios for the American Rescue Plan Act of 2021

“…• No smoothing: This path uses estimates of the impact on GDP from the various provisions of ARP from Edelberg and Sheiner (2021), along with assumptions about when the provisions will be spent. This path takes on board Karger and Rajan's (2020) finding that the CARES Act checks sent to households were spent quickly.…”