Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model?

Huntley, Jonathan; Michelangeli, Valentina

doi:10.1257/mac.6.1.162

Cited by 21 publications

(27 citation statements)

References 54 publications

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“…The tax rebate of 2001 was part of a broader tax reform, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), enacted in May 2001 by the U.S. Congress. Huntley and Michelangeli's (2014) model focused exclusively on the distinction between taxable and tax-deferred assets. In order to make this component of the reform highly visible during calendar year 2001, the Administration paid 11 For example, within incomplete-markets economies, Aiyagari and Gertler (1991) focused on the equity premium; Erosa and Ventura (2002) revisited, quantitatively, the question of welfare effects of inflation; Ragot (2011) studied the joint distribution of money and financial assets.…”

Section: On the 2001 Tax Rebatementioning

confidence: 99%

A Model of the Consumption Response to Fiscal Stimulus Payments

2014

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A wide body of empirical evidence finds that approximately 25 percent of fiscal stimulus payments (e.g., tax rebates) are spent on nondurable household consumption in the quarter that they are received. To interpret this fact, we develop a structural economic model where households can hold two assets: a low-return liquid asset (e.g., cash, checking account) and a high-return illiquid asset that carries a transaction cost (e.g., housing, retirement account). The optimal life-cycle pattern of portfolio choice implies that many households in the model are "wealthy hand-to-mouth": they hold little or no liquid wealth despite owning sizable quantities of illiquid assets. Therefore, they display large propensities to consume out of additional transitory income, and small propensities to consume out of news about future income. We document the existence of such households in data from the Survey of Consumer Finances. A version of the model parameterized to the 2001 tax rebate episode yields consumption responses to fiscal stimulus payments that are in line with the evidence, and an order of magnitude larger than in the standard "one-asset" framework. The model's nonlinearities with respect to the rebate size and the prevailing aggregate economic conditions have implications for policy design.

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Section: On the 2001 Tax Rebatementioning

confidence: 99%

A Model of the Consumption Response to Fiscal Stimulus Payments

2014

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“…A number of important macroeconomic implications of heterogeneous responses to shocks and stabilization policies have been recently investigated in the theoretical literature (Ragot 2010, Kaplan andViolante forthcoming, andHuntley andMichelangeli 2014). Yet, their relevance towards measuring the impact of fiscal policy on aggregate expenditure has been overlooked in the data.…”

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confidence: 99%

Consumption, Income Changes, and Heterogeneity: Evidence from Two Fiscal Stimulus Programs

Misra

Surico

2014

American Economic Journal: Macroeconomics

141

122

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Almost half of American families did not adjust their consumption following receipt of the 2001 or 2008 tax rebates. Another 20 percent, with low income and more likely to rent, spent a small but significant amount. Households with large spending propensity held high levels of mortgage debt. The heterogeneity is concentrated in a few nondurable categories and a handful of "new vehicle" purchases. The cumulated predictions of the heterogeneous response model tend to be smaller and more accurate than their homogeneous response model counterparts, offering new insights on the evaluation of the two fiscal stimulus programs. (JEL D12, D91, E21, E32, E62) "When a full analysis of heterogeneity in responses was made [in microeconometric investigations], a variety of candidate averages emerged to describe the 'average' person, and the long-standing edifice of the representative consumer was shown to lack empirical support." -James J. Heckman (2001, p. 674) "We may expect to see that integrating individual coefficients [from models of heterogeneous responses] yields roughly mean effect as estimated by the associated least-squares coefficient. One should be cautious, however, about this interpretation in very heterogeneous situations." -Roger Koenker (2005, p. 302) In the aftermath of the recent financial crisis, governments around the world have sought to support the economy through unprecedented fiscal interventions. Considerable uncertainty (and disagreement among economists) exists, however, around the impact of these policies. At the heart of this uncertainty lays the recognition that the effects of fiscal policies on the aggregate economy cannot be fully understood without explicit consideration of distributional dynamics. This important insight feeds into a growing macroeconomic literature which explicitly recognizes that consumers and entrepreneurs are inherently different in their access to

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“…Finally, some work (van den Noord, 2000;Barrell and Pina, 2004;Veld, Larch, and Vandeweyer, 2013) uses large macro simulation models to conduct exercises in the same spirit as ours, but their models are often too complicated to isolate the different channels of stabilization and they typically assume representative agents, shutting off the redistribution and social insurance channels that we will find to be important. Huntley and Michelangeli (2011) and Kaplan and Violante (2014) are closer to us in the use of optimizing models with heterogeneous agents to study fiscal policy. However, they estimate multipliers to discretionary tax rebates, whereas we estimate the systematic impact on the ergodic variance of the automatic features of the fiscal code.…”

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confidence: 99%

The Role of Automatic Stabilizers in the U.S. Business Cycle

McKay

Reis

2013

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Most countries have automatic rules in their tax-and-transfer systems that are partly intended to stabilize economic fluctuations. This paper measures their effect on the dynamics of the business cycle. We put forward a model that merges the standard incomplete-markets model of consumption and inequality with the new Keynesian model of nominal rigidities and business cycles, and that includes most of the main potential stabilizers in the U.S. data and the theoretical channels by which they may work. We find that the conventional argument that stabilizing disposable income will stabilize aggregate demand plays a negligible role in the dynamics of the business cycle, whereas tax-and-transfer programs that affect inequality and social insurance can have a larger effect on aggregate volatility. However, as currently designed, the set of stabilizers in place in the U.S. has had little effect on the volatility of aggregate output fluctuations or on their welfare costs despite stabilizing aggregate consumption. The stabilizers have a more important role when monetary policy is constrained by the zero lower bound, and they affect welfare significantly through the provision of social insurance.JEL codes: E32, E62, H30.

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Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model?

Cited by 21 publications

References 54 publications

A Model of the Consumption Response to Fiscal Stimulus Payments

A Model of the Consumption Response to Fiscal Stimulus Payments

Consumption, Income Changes, and Heterogeneity: Evidence from Two Fiscal Stimulus Programs

The Role of Automatic Stabilizers in the U.S. Business Cycle

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