Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore

Abstract

This paper uses a unique panel dataset of consumer financial transactions to study how consumers respond to an exogenous unanticipated income shock. Consumption rose significantly after the fiscal policy announcement: during the ten subsequent months, for each $1 received, consumers on average spent $0.80. We find a strong announcement effect—19 percent of the response occurs during the first two-month announcement period via credit cards. Subsequently, consumers switched to debit cards after disbursement before finally increasing spending on credit cards in the later months. Consumers with low liquid assets or with low credit card limit experienced stronger consumption responses. (JEL D12, D14, E21)

Fiscal Policy and MPC Heterogeneity

“…4 Our survey question refers to a transitory income shock, and, hence, we would expect a relatively low-consumption response.…”

Consumer Spending and the Economic Stimulus Payments of 2008

“…9 For households that did not provide a routing number, the payments were mailed using paper checks over a nine-week period ranging from early May through early July. 10 The IRS mailed a notice to the ESP recipients in advance of sending the payments.…”

“…12 This article focuses on the stimulus payments, as recorded in our CE dataset. 9 Payments were directly deposited only to personal bank accounts. Payments were mailed to tax filers who had provided the IRS with their tax preparer's routing number, e.g., as part of taking out a "refund anticipation loan."…”

Sunk Cost Fallacy in Driving the World's Costliest Cars

“…By design, government policies to restrict car ownership require buyers of new cars to make payments that are only partially refundable and so impose explicit sunk costs. Over time, these policies have generated substantial variation in the sunk costs incurred in new car purchases (and, incidentally, caused Singapore cars to become the world's most expensive; see Agarwal and Qian 2014). The government policies are long-standing and are repeatedly publicized, and thus, the sunk costs are certainly salient to people in Singapore.…”