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

53 Pages Posted: 15 Jun 2020

See all articles by Ezra Karger

Ezra Karger

Federal Reserve Bank of Chicago

Aastha Rajan

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: May, 2020

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).

Keywords: Covid-19, CARES Act, high-frequency data, stimulus payments, marginal propensity to consume

JEL Classification: D04, D12, E21

Suggested Citation

Karger, Ezra and Rajan, Aastha, Heterogeneity in the Marginal Propensity to Consume: Evidence from Covid-19 Stimulus Payments (May, 2020). FRB of Chicago Working Paper No. WP 2020-15, Available at SSRN: https://ssrn.com/abstract=3625104 or http://dx.doi.org/10.21033/wp-2020-15

Ezra Karger (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Aastha Rajan

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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