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 th

consumer response to the timing of income evidence from a change in tax withholding in 1992 the income tax withholding tables were adjusted so that withholding was reduced a typical worker received an extra 28 80 in take home pay per month in march through december 1992 to be offset by a lower tax refund in 1993 the change in withholding amounted to 0 5 percent of gdp president bush who proposed this change in his state of the union address intended that it provide a temporary stimulus to demand but the policy change involved only the timing of income so under the life cycle permanent income model it would be predicted to have a negligible effect on consumption and aggregate demand this paper reports consumers responses to the change in withholding the results are based on a survey taken shortly after it went into effect forty three percent of consumers report spending the extra take home pay substantially more than the zero percent predicted by the standard models but substantially less than the one hundred percent upon which the policy was predicated the decision to save the income is not explained by expected income growth therefore while behavior of many households is not fully consistent with the life cycle permanent income model liquidity constraints do not appear to account for this behavior this abstract was borrowed from another version of this item

consumer spending and the economic stimulus payments of 2008 abstract we measure the change in household spending caused by receipt of the economic stimulus payments of 2008 using questions added to the consumer expenditure survey and variation from the ran

micro versus macro consumption data the cyclical properties of the consumer expenditure survey the consumer expenditure survey cex offers the most comprehensive consumption data at the consumer level for the united states several previous studies have shown a large gap between per capita consumption from the cex and the aggregate personal consumption expenditure pce series while previous research has focused on consumption levels we focus on the cyclical properties of consumption we find that the cyclical properties of consumption expenditure data from the two sources are quantitatively very different this result calls for caution when using cex data for business cycle research

child labor and schooling responses to anticipated income in south africa abstract forward looking unconstrained households make child labor and schooling decisions considering their permanent income and weighing the relative returns to child time in various potential activities the timing of anticipated changes in income should have no effect on child labor and schooling in a setting where households can borrow against permanent income however this study documents large increases in schooling attendance and declines in total hours worked when black south african families become eligible for fully anticipatable social pension income as an explanation the data are most consistent with liquidity constraints for black elder males forcing rural families into less schooling for boys than they would choose absent the constraint perhaps because of schooling costs

the power of forward guidance revisited in recent years central banks have increasingly turned to forward guidance as a central tool of monetary policy especially as interest rates around the world have hit the zero lower bound standard monetary models imply that far future forward guidance is extremely powerful promises about far future interest rates have huge effects on current economic outcomes and these effects grow with the horizon of the forward guidance we show that the power of forward guidance is highly sensitive to the assumption of complete markets if agents face uninsurable income risk and borrowing constraints a precautionary savings effect tempers their responses to changes in future interest rates as a consequence forward guidance has substantially less power to stimulate the economy in addition we show that the business cycle dynamics of our incomplete markets model differ substantially from its complete market counterpart this contrasts with the well known results of krusell and smith 1998 we present approximate representations that can easily be incorporated into standard business cycle models

an indicator of future inflation extracted from the steepness of the interest rate yield curve along its entire length the term structure slope contains information about expected future inflation mishkin shows that the spread between the twelve month and three month interest rates helps predict the difference between twelve month and three month inflation we apply a simple existing framework which lets the real interest rate vary in the short run but converge to a constant in the long run to this problem the appropriate indicator of expected inflation uses the entire length of the yield curve estimating the steepness of a specific nonlinear transformation rather than being restricted to a spread between two points the resulting indicator better predicts inflation over 1960 1991

durable goods an explanation for their slow adjustment at the microeconomic level durable purchases are often discontinuous and relatively large this feature has the potential to explain why aggregate expenditure on durables responds only slowly relative to the frictionless permanent income model to wealth and other aggregate innovations in this paper i develop new results on the problem of dynamic aggregation of stochastically heterogeneous units which help to characterize the connection between microeconomic behavior and aggregate dynamics in the presence of nonconvex adjustment costs using these results and splitting postwar u s aggregate durable purchases into different subcategories and time periods i provide further support for the view that lumpy microeconomic purchases play an important role in explaining the time series behavior of aggregate expenditure on durable goods

are consumers forward looking evidence from fiscal experiments how changes in current and future income affect consumer spending is a perennial question in macroeconomics and public finance theoretical constructs such as the permanent income hypothesis are of limited assistance in resolving this issue because they neglect borrowing constraints and other market imperfections that can significantly affect the marginal propensity to spend out of current income recent empirical work has also proven inconclusive since whether consumption responds to income fluctuations by more or less than the permanent income hypothesis predicts turns critically upon whether disposable income follows a random walk or is stationary around a longrun trend see john campbell and angus deaton 1987 this controversy is unlikely to be resolved conclusively because it is notoriously difficult to distinguish a stationary but highly persistent time series from one that is nonstationary these difficulties suggest the importance of searching for natural experiments income shocks with predictable and well understood effects on future income to test models of consumer behavior changes in federal tax and transfer policy during the last two decades provide several episodes of this type analyzing the effects of these tax changes is also central to understanding the role of fiscal policy in affecting national saving this paper examines two aspects of consumer response to tax changes section i argues that consumption responds to temporary income tax shocks by more than the permanent income hypothesis would suggest results from the 1975 tax rebate in particular suggest that a 1 increase in transitory income raises spending by about 20 cents section ii examines consumption responses to tax announcements although the results are not conclusive they suggest that some consumers do not adjust consumption in anticipation of tax changes the final section sketches some implications for analyzing fiscal policy

learning in a misspecified multivariate self referential linear stochastic model this paper introduces a general method to study stability under learning of equilibria resulting from agents with misspeci ed perceptions of the law of motion of the economy this is done by transforming the actual and perceived laws of motion into the form of seemingly unrelated regressions and then linearly projecting the actual law of motion into the same class as the perceived law of motion i study the new keynesian is lm model with inertia under all possible classes of restricted perceptions it turns out that the results found in bullard and mitra 2002 2003 are robust under misspeci ed expectations

fiscal consolidations and heterogeneous expectations abstract we analyze fiscal consolidations using a new keynesian model where agents have heterogeneous expectations and are uncertain about the composition of consolidations we look at spending based and tax based consolidations and analyze their effects separately we find that the effects of consolidations and the output multipliers are sensitive to heterogeneity in expectations before and after implementation of a specific fiscal plan depending on the beliefs about the type of consolidation prior to implementation we show that heterogeneity in expectations may lead to optimism in the economy improving thus the performance of a specific fiscal plan or can work towards the opposite direction leading to pessimism amplifying the contractionary effects of the consolidation in general we find that spending based consolidations last longer and lead to deeper recessions when agents are boundedly rational compared to the rational expectations benchmark while the opposite holds for tax based consolidations

social security benefits consumption expenditure and the life cycle hypothesis this paper examines the impact of changes in social security benefits on aggregate consumption expenditure under the null hypothesis there should be no contemporaneous effect at the monthly frequency because increases in benefits have always been announced at least 6 weeks prior to payment the paper develops overwhelming evidence contrary to the null that benefits have affected aggregate spending the results have strong implications for several important issues including ricardian equivalence government policy irrelevance and the excess sensitivity of consumption to changes in income

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

the life cycle model of consumption and saving a central implication of life cycle models is that agents smooth consumption we review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime we find that life cycle models particular those which incorporate realistic features of markets and goods have more empirical successes than failures we also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents finally we emphasize that the coherence of life cycle models imposes an important discipline when incorporating new features into models

the spending and debt response to minimum wage hikes abstract immediately following a minimum wage hike household income rises on average by about 250 per quarter and spending by roughly 700 per quarter for households with minimum wage workers most of the spending response is caused by a small number of households who purchase vehicles furthermore we find that the high spending levels are financed through increases in collateralized debt our results are consistent with a model where households can borrow against durables and face costs of adjusting their durables stock jel d12 d14 d91 j38

the timing of pay abstract there exists large and persistent variation in not only how but when employees are paid a fact unexplained by existing theory this paper develops a simple model of optimal pay timing for firms when workers have self control problems they under save and experience volatile consumption between paychecks thus pay whose delivery matches the timing of workers consumption needs will reduce wage costs the model also explains why pay timing should be regulated as it is in practice although the worker benefits from a timing profile that smoothes her consumption her lack of self control induces her to attempt to undo the arrangement either by renegotiating with her employer or by taking out payday loans regulation of pay timing and consumer borrowing is required to counter these efforts helping the worker help herself

fiscal policy with heterogeneous agents and incomplete markets i undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint temporary tax changes are found to have large real effects in the benchmark model a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost comparing the benchmark incomplete markets model to a complete markets economy income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete copyright 2005 wiley blackwell

directed attention and nonparametric learning abstract this paper examines the implications of learning for the effects of ambiguity aversion the key result is that since agents naturally choose to learn about the sources of uncertainty that reduce utility the most information acquisition attenuates the most severe effects of ambiguity aversion the specific setting we study is the canonical consumption savings problem agents endogenously learn most about income dynamics at the very lowest frequencies while ambiguity aversion typically implies in this setting excessive extrapolation of income shocks that effect is eliminated here furthermore deviations of consumption from the full information benchmark are largest at high frequencies so the model naturally generates overreaction of consumption to predictable short run income variation

3rd of tha month do social security recipients smooth consumption between checks this paper examines the response of consumption expenditures to the monthly receipt of social security checks since the amount and arrival date of these checks are known to the recipients the basic life cycle permanent income hypothesis lcpih predicts that consumption should not respond to the receipt of these checks using daily diary data from the consumer expenditure survey this paper finds evidence that both the dollar amount and probability of expenditures increase immediately following the receipt of this check most relevant to testing the lcpih categories of instantaneous consumption expenditure such as food away from home increase on the check arrival date the response is found primarily amongst households for whom social security is the primary source of income however the magnitude of the estimated responses are relatively small and do not suggest that the utility losses are large from this non smoothing behavior this abstract was borrowed from another version of this item

the institutional and psychological foundations of natural resource policies abstractthe pressures of political interests which drive the resource curse are well understood but ordinary citizens are usually cast both as the innocent victims of this process and as the potential solution if only governments could be made more accountable to them this paper draws upon recent developments in social psychology to discuss the formation of mass opinions on two aspects of resource ownership one is the spatial assignment of ownership between local and national claims which has been a significant cause of conflict the other is the assignment of revenues between current consumption and future investment which has usually been excessively biased towards the former i suggest why in the absence of an active government communications policy to offset them known psychological biases may interact with resource discoveries to generate mass opinions which contribute to these problems

tax reform and automatic stabilization an income tax provides implicit insurance by dampening the variability of disposable income and consumption using an empirical framework derived from the consumption insurance literature and data from the panel study of income dynamics we examine the effect of federal income tax reforms of the 1980 s on automatic stabilization of consumption overall erta and tra86 reduced consumption stability by about 50 percent recently increased eitc generosity restored or enhanced consumption insurance the welfare cost of moving to the post tra86 system is sizable for relatively risk averse households facing large income risk but is much more modest for the typical household jel h21

tax cuts for whom heterogeneous effects of income tax changes on growth and employment this paper investigates how tax changes for different income groups affect aggregate economic activity i construct a measure of who received or paid for tax changes in the postwar period using t

requiem for the representative consumer aggregate implications of microeconomic consumption behavior macroeconomists pursuing microfoundations for aggregate consumption have generally adopted one of two approaches either to model microeconomic consumption behavior carefully and then to aggregate or to thoroughly understand the behavior of a representative consumer in general equilibrium then to introduce microeconomic risk and heterogeneity the broad conclusion from the bottom up approach has been that precautionary saving and microeconomic heterogeneity can profoundly change behavior stephen p zeldes 1989 angus s deaton 1991 christopher d carroll 1992 the broad conclusion from the top down approach has been that precautionary saving is of little importance in determining the aggregate capital stock s rao aiyagari 1994 per krusell and anthony a smith 1998 leading some economists to conclude that heterogeneity is unimportant for macroeconomic purposes this paper shows that while general equilibrium effects do imply that the aggregate magnitude of precautionary saving is modest nevertheless when a model with uninsurable idiosyncratic risk is modified so that it can match the key micro facts it produces behavior very different in important respects from that produced by the representative agent economy this leads to the conclusion that for many purposes the representative consumer model should be abandoned in favor of a model which matches key microeconomic facts this abstract was borrowed from another version of this item

transaction costs and consumption abstract the rational expectations permanent income hypothesis re pih fails to explain several well documented features of consumption behavior first the estimated marginal propensity to consume mpc for unanticipated transitory income shocks is often much higher than what the theory warrants second the estimated mpc is typically much bigger for small shocks of this type than for large shocks third consumption is often smoothed against large anticipated future income changes but not always against small changes this paper argues that these findings can be reconciled within a re pih model that includes a cash in advance constraint and an assumption that the agent is required to pay a fixed transaction cost to transfer wealth between cash and assets key results of the paper include first the agent follows an s s rule with respect to cash holdings when he makes wealth transfer decisions second the mpc within the no transfer band is higher than that out of the band and can be as high as exactly equal to one and third the agent smoothes consumption in response to news of large future income changes but not necessarily to small ones

the response of expenditures to anticipated income changes panel data estimates standard models of intertemporal allocation predict that the time path of expenditures should be independent of the time path of income recently two papers parker 1999 and souleles 1999 have suggested that u s households have a high marginal propensity to spend within year anticipated income changes we use an expenditure survey panel from spain to re examine this issue we exploit two important features of the spanish data first we have quarterly panel data that follows households for more than four quarters second we use the fact that workers are exogenously sorted into one of two payment schemes some receive the same amount each month of the year and others receive an extra payment in june and december the extra payment is large and predictable we examine the detailed pattern of expenditures over the year to see whether they differ between the two groups we fail to find even weak differences we complement this with a conventional euler equation analysis of excess sensitivity our predicting equation for quarterly earnings growth is much better than usual and is likely to give a powerful test of the hypothesis that predictable changes in income do not lead to changes in expenditure patterns the results of this analysis confirm the graphical analysis we find no evidence of excess sensitivity we conclude that households in normal times do smooth consumption over the year we suggest a reconciliation of our results with those of parker and souleles

do consumers react to anticipated income changes evidence from the alaska permanent fund a central implication of the life cycle permanentincome hypothesis lc pih is that consumers should not respond to predictable changes in their income to test this hypothesis a number of recent papers have exploited natural experiments to identify anticipated income changes in particular recent work by parker 1999 uses the change in after tax income due to the cap on earnings subject to the social security tax and a related paper by souleles 1999 examines the response of consumption to income tax refunds surprisingly parker and souleles find that even when income is expected to change within the year expenditure is excessively sensitive to the timing of the income change while their results can be interpreted as evidence that our canonical model of consumption is inadequate an alternative explanation is that the anticipated income changes they exploit are small and irregular and that households will not bother to change their consumption paths when the computational costs involved are large relative to the utility gains in support of this interpretation browning and collado 2001 find that the seasonal consumption patterns of spanish households that work in sectors that provide regular bonus payments do not differ from those of households that do not receive bonus payments this paper adds to this evidence by exploiting a natural experiment provided by annual payments from the state of alaska s permanent fund to every resident in the state of alaska that should yield an unusually powerful test of the lc pih these payments are large and clearly anticipated by alaskan residents using the variation in the size of the payments over time and in the amount received by families of different sizes to identify the response of consumption to payments from the permanent fund i find no evidence that the consumption of alaskan households reacts to these payments in addition i find no evidence that the seasonal pattern of consumption in alaska differs from that in the other 49 states or that households in alaska are subject to fewer liquidity constraints engage in less buffer stock saving or spend a smaller fraction of their income on semidurable goods than households in the rest of the united states however although households in alaska do not overreact to payments from the permanent fund i find that the consumption of the very same households is excessively sensitive to their income tax refunds this evidence suggest that households will take anticipated income changes into account in their consumption decisions when the income changes are large regular and easy to predict but will not do so when they are small and irregular the paper proceeds as follows the next section of the paper presents details on the department of economics princeton university princeton nj 08544 and national bureau of economic research e mail chsieh princeton edu i am very grateful to the bureau of labor statistics bls for providing access to the data from the consumer expenditure survey and to its staff particularly steven henderson walter vandeheide and wolf weber for their generous assistance during my visits to the bls i also thank nanci jones for providing data and patiently answering questions on the operation of the alaska permanent fund anne case angus deaton jonathan parker and two referees provided useful comments the views expressed in this paper are personal and should not be attributed to the bls 1 i refer to the certainty equivalent version of the lc pih or one in which the expected variance of consumption is constant as is well known without these assumptions the lc pih only implies smoothing of marginal utility not necessarily of consumption 2 see christina h paxson 1992 john shea 1995 jonathan a parker 1999 nicholas s souleles 1999 martin browning and m dolores collado 2001 also see ronald a bodkin 1959 for an early example of the use of a natural experiment to test for excess sensitivity for comprehensive reviews of the large literature on empirical tests of the lc pih see angus deaton 1992 browning and annamaria lusardi 1996 and browning and thomas f crossley 2001 3 in 1998 for example the permanent fund paid 1 541 to every resident of the state of alaska

union contracts and the life cycle permanent income hypothesis this paper isolates households in the psid whose heads can be matched to particular long term union contracts with high confidence the author uses use published information on these contracts to construct a household specific measure of expected wage growth he finds that predictable wage movements are significantly correlated with consumption changes contrary to neoclassical consumption theory the author finds that consumption responds more strongly to predictable income declines than to predictable income increases this asymmetry is inconsistent with liquidity constraints and myopia but is qualitatively consistent with models in which preferences exhibit loss aversion copyright 1995 by american economic association

limited participation in international business cycle models a formal evaluation in this paper we study the role of limited asset market participation lamp for international business cycles we show that when limited participation is introduced into an otherwise standard model of international business cycles the performance of the model improves signi cantly especially in matching cross country correlations to perform formal evaluation of the models we develop a novel statistical procedure that adapts the test of vuong 1989 to dsge models and accounts for the possibility that models are misspeci ed based on this test we show that the improvements brought out by lamp are statistically signi cant leading a model with lamp to outperform a representative agent model furthermore when lamp is introduced a model with complete markets is found to do better than a model with no trade in nancial assets a well known favorite in the literature our results remain robust to the inclusion of investment speci c technical change

consumption commitments and habit formation we analyze the implications of household level adjustment costs for the dynamics of aggregate consumption we show that an economy in which agents have consumption commitments is approximately equivalent to a habit formation model in which the habit stock is a weighted average of past consumption if idiosyncratic risk is large relative to aggregate risk consumption commitments can thus explain the empirical regularity that consumption is excessively sensitive and excessively smooth findings that are typically attributed to habit formation unlike habit formation and other theories but consistent with empirical evidence the consumption commitments model also predicts that excess sensitivity and smoothness vanish for large shocks these results suggest that behavior previously attributed to habit formation may be better explained by adjustment costs we develop additional testable predictions to further distinguish the commitment and habit models and show that the two models have different welfare implications

do liquidity constraints and interest rates matter for consumer behavior evidence from credit card data this paper utilizes a unique new dataset of credit card accounts to analyze how people respond to changes in credit supply the data consist of a panel of thousands of individual credit card accounts from several different card issuers with associated credit bureau data we estimate both marginal propensities to consume mpcs out of liquidity and interest rate elasticities we also evaluate the ability of different models of consumption to rationalize our results distinguishing the permanent income hypothesis pih liquidity constraints precautionary saving and behavioral models we find that increases in credit limits generate an immediate and significant rise in debt counter to the pih the average mpc out of liquidity ddebt dlimit ranges between 10 14 the mpc is much larger for people starting near their limits consistent with binding liquidity constraints however the mpc is significant even for people starting well below their limit we show this response is consistent with buffer stock models of precautionary saving nonetheless there are other results that conventional models cannot easily explain e g why so many people are borrowing on their credit cards and simultaneously holding low yielding assets unlike most other studies we also find strong effects from changes in account specific interest rates the long run elasticity of debt to the interest rate is approximately 1 3 less than half of this elasticity represents balance shifting across cards with most reflecting net changes in total borrowing the elasticity is larger for decreases in interest rates than for increases which can explain the widespread use of temporary promotional rates the elasticity is smaller for people starting near their credit limits again consistent with liquidity constraints

the response of household consumption to income tax refunds a central implication of the life cycle or permanent income theory is that consumption should not respond to predictable fluctuations in income tests of this implication have yielded mixed results especially on micro data angus deaton 1992 martin browning and annamaria lusardi 1996 in large part this might be due to the difficulties of isolating the predictable component of income at the micro level most tests proceed by instrumenting for income but since the available instruments are typically poor such tests might be prejudiced against finding significant excess sensitivity of consumption to income john shea 1995 also it is not clear how closely the resulting econometric predictions of income coincide with agents actual expectations of income to avoid these difficulties this paper examines the response of household consumption to a particular type of income that is both predictable and transitory income tax refunds since a refund depends on events in the previous calendar year it is predictable income as regards consumption in the year of its receipt consequently under the life cycle theory consumption should not increase on receipt of a refund 2 in addition to testing the canonical model of consumption this paper provides estimates interpretable as the marginal propensity to consume mpc out of refunds since federal tax refunds now amount to over 80 billion per year averaging well over 1 000 per refund these estimates are of interest in themselves more generally they bear on the impact of even preannounced and temporary changes in fiscal policy the paper begins by surveying related studies in section i section ii describes the data the consumer expenditure survey cex which of the leading u s micro data sets has the most comprehensive coverage of expenditure the empirical specification is set out in section hi section iv reports the results and section v concludes

precautionary saving and consumption fluctuations this paper uses the consumption euler equation to derive a decomposition of consumption growth into four sources these four sources are new information and three sources of predictable consumption growth intertemporal substitution changes in the preferences for consumption and incomplete markets for consumption insurance using household level data we implement this decomposition for the average growth rate of consumption expenditures on nondurable goods in the united states from 1982 to 1997 the economic importance of precautionary saving rivals that of the real interest rate but the relative importance of each source of movement in the volatility of consumption is not precisely measured

how prudent are consumers using data from the consumer expenditure survey this paper presents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive the coefficient of relative prudence the test yields a fairly precise estimate of a small precautionary motive in fact the estimate is too small to be consistent with widely accepted beliefs about risk aversion the presence of liquidity constrained households does not appear to explain this finding and there is some evidence that self selection of households into risky environments also cannot explain the results

college tuition and household savings and consumption abstract despite the high cost of college there has been little study of the adequacy of household savings and other resources available to fund college to gauge their adequacy this paper examines households standard of living as they pay for college using the consumer expenditure survey the main finding is that households appear to do a relatively good job smoothing their consumption into the academic year despite large expenses this is consistent with the life cycle theory of saving and consumption there is some evidence of a delayed decline in consumption and of a decline for households with children first beginning college but the magnitudes of these declines are rather small

dynamic scoring a back of the envelope guide abstract this paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth the model yields simple expressions for the steady state feedback effect of a tax cut the feedback is surprisingly large for standard parameter values half of a capital tax cut is self financing the paper considers various generalizations of the basic model including elastic labor supply general production technologies departures from infinite horizons and non neoclassical production settings it also examines how the steady state results are modified when one considers the transition path to the steady state

unanticipated aggregate disturbances and tests of the life cycle consumption model several recent studies have used data on food consumption from the panel study of income dynamics psid to test t he rational expectations life cycle hypothesis against the alternative of prevalent liquidity constraints these tests invoke the rational expectations restriction that income forecast errors are independent of lagged information this restriction however applies only in a time series context it is possible that unanticipated macroeconomic disturbances cause forecast errors to be correlated with lagged information in a cross section of families the authors present evidence of such a correlation in the psid data show that this correlation biases previous tests of the life cycle model toward rejection and derive a proper test of the life cycle model using pa nel data copyright 1993 by mit press

consumer response to the reagan tax cuts abstract this paper uses micro data from the consumer expenditure survey to estimate the response of household consumption to the second and third phases of the reagan tax cuts since these phases were pre announced they allow for an unusually clean test of the canonical life cycle permanent income model consumption is found to be excessively sensitive to the tax cuts counter to the model liquidity constraints and other standard explanations do not appear to explain this excess sensitivity the consumption response is larger than previously estimated for tax refunds and more concentrated in nondurables these differences have important implications for the structure of tax changes in particular for choosing between varying withholding rates versus varying lumpy final tax payments and refunds

the hyperbolic consumption model calibration simulation and empirical evaluation ur preferences for the long run tend to conflict with our short run behavior when planning for the long run we intend to meet our deadlines exercise regularly and eat healthfully but in the short run we have little interest in revising manuscripts jogging on the stairmaster and skipping the chocolate souffleala mode delay of gratification is a nice long term goal but instant gratification is disconcertingly tempting this gap between long run intentions and short run actions is apparent across a wide range of behaviors including saving choices a 1997 survey found that 76 percent of respondents believe they should be saving more for retirement looking only at respondents who believed they were at an age where you should be seriously saving already the survey found that 55 percent reported being behind in their savings and only 6 percent reported being ahead farkas and johnson 1997 the report on the survey concluded t he gaps between people s atti tudes intentions and behavior are troubling and threaten increased insecurity and dissatisfaction for people when they retire americans are simply not doing what logic and their own reasoning suggests they should be doing a 1993 luntz webber merrill lynch survey found similar answers when baby boomers were asked what percentage of your annual household income do you think you should save for retirement and what percentage of your annual

testing the response of consumption to income changes with noisy panel data this paper tests the rational expectations lifecycle model of consumption against i a keynesian model and ii the rational expectations lifecycle model with imperfect capital markets the tests are based upon the relative responsiveness of consumption to income changes that can be predicted from past information and income changes that cannot he predicted the tests allow for measurement error in income the results reject the keynesian model and generally support the lifecycle model but the results are not sufficiently precise to rule out the possibility that some households are liquidity constrained measurement error has a strong influence on the relationship between consumption and income

testing for liquidity constraints in euler equations with complementary data sources previous tests for liquidity constraints using consumption euler equations have frequently split the sample on the basis of wealth arguing that low wealth consumers are more likely to be constrained we propose alternative tests using different and more direct information on borrowing constraints obtained from the 1983 survey of consumer finances in a first stage we estimate probabilities of being constrained which are then utilized in a second sample the panel study of income dynamics to estimate switching regression models of the euler equation our estimates indicate stronger excess sensitivity associated with the possibility of liquidity constraints than the sample splitting approach

elasticity of intertemporal substitution in consumption in the presence of inertia empirical evidence from a natural experiment this paper estimates the elasticity of intertemporal substitution in consumption by exploiting a natural experiment provided by a change in the indian banking legislation the new legislation authorized banks to offer higher interest rates on deposits to citizens above 60 years of age we find evidence that households exhibit inertia in reoptimization and are sensitive to the timing of the actual change in the interest rate households do not respond to the predictable changes in future interest rates induced by the change in the legislation we incorporate this and estimate the to be approximately equal to 2 2 this paper was accepted by amit seru finance

changes in the output euler equation and asset markets participation recent estimates of the output euler equation for the united states indicate that the elasticity of aggregate demand to interest rates is not significantly different from zero we first argue that this result may hide a structural break the estimated elasticity is a convolution of two coefficients with opposite signs across the samples 1965 1979 and 1982 2003 the sign of the coefficient in the earlier sample is inconsistent with standard economic theory and intuition we outline a model with limited asset markets participation that can generate this change in sign when asset market participation changes from low to high and provide institutional evidence for such a change in the united states in the late 70s and early 80s

household expenditure and the income tax rebates of 2001 using questions expressly added to the consumer expenditure survey we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income hypothesis we exploit the unique randomized timing of rebate receipt across households households spent 20 to 40 percent of their rebates on nondurable goods during the three month period in which their rebates arrived and roughly two thirds of their rebates cumulatively during this period and the subsequent three month period the implied effects on aggregate consumption demand are substantial consistent with liquidity constraints responses are larger for households with low liquid wealth or low income

durables nondurables down payments and consumption excesses abstract we examine a model that generalizes the standard buffer stock model of saving to accommodate durables nondurables down payment requirements and adjustment costs in the durables market we find that nondurable consumption becomes more volatile relative to income as down payments decrease at the individual and at the aggregate level moreover for plausible parameter values the model can explain the excess smoothness and excess sensitivity observed in u s aggregate data the result follows from a gradual adjustment of consumption to permanent income shocks when agents attempt to spread out the burden of down payments over time compounded by slow adjustment due to transaction costs

do homeowners increase consumption after the last mortgage payment an alternative test of the permanent income hypothesis the maturity date of a mortgage loan marks the end of monthly mortgage payments for homeowners in the period after the last payment homeowners experience an increase in their disposable income our study interprets this event as an anticipated increase in income and tests whether households smooth consumption over the transition period as predicted by the rational expectation life cycle permanent income hypothesis we find households do not alter nondurable goods consumption in the period following the last mortgage payment instead they increase both financial savings and savings in durable goods such as house furnishings and entertainment equipment in the year of the last mortgage payment

activist fiscal policy during and after the great recession that began in december 2007 the u s federal government enacted several rounds of activist fiscal policy in this paper we review the recent evolution of thinking and evidence regarding the effectiveness of activist fiscal policy although fiscal interventions aimed at stimulating and stabilizing the economy have returned to common use their efficacy remains controversial we review the debate about the traditional types of fiscal policy interventions such as broad based tax cuts and spending increases as well as more targeted policies while there have been improvements in estimates of the effects of broad based policies much of what has been learned recently concerns how such multipliers might vary with respect to economic conditions such as the credit market disruptions and very low interest rates that were central features of the great recession the eclectic and innovative interventions by the federal reserve and other central banks during this period highlight the imprecise divisions between monetary and fiscal policy and the many channels through which fiscal policies can be implemented

is consumption growth consistent with intertemporal optimization evidence from the consumer expenditure survey in this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in u s household level data we propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations we estimate preference parameters using the only u s micro data set with complete consumption information we show that previous rejections can be explained by the simplifying assumptions made in previous studies we also show that results obtained using good consumption or aggregate data can be misleading

fiscal news and macroeconomic volatility abstract this paper analyzes the contribution of anticipated capital and labor tax shocks to business cycle volatility in an estimated new keynesian business cycle model while fiscal policy accounts for about 15 of output variance at business cycle frequencies this mostly derives from anticipated government spending shocks tax shocks both anticipated and unanticipated contribute little to the fluctuations of real variables however anticipated capital tax shocks do explain a sizable part of inflation fluctuations accounting for up to 12 of its variance in line with earlier studies news shocks in total account for about 50 of output variance further decomposing this news effect we find permanent total factor productivity news shocks to be most important when looking at the federal level instead of total government the importance of anticipated tax and spending shocks significantly increases suggesting that fiscal policy at the subnational level typically counteracts the effects of federal fiscal policy shocks

the effects of government transfers on monthly cycles in drug abuse hospitalization and mortality this paper analyzes the monthly patterns of adverse outcomes due to the consumption of illegal drugs by recipients of government transfer payments we find evidence that certain subpopulations on government cash aid significantly increase their consumption of drugs when their checks arrive at the beginning of the month and as a result experience adverse events including hospitalization and death using data from california we find that the overall rate of drug related hospital admissions increases abruptly at the beginning of the month with admissions increasing 23 during the first five days of the month we find that this cycle is driven largely by recipients of supplemental security income ssi ssi recipients also experience an abrupt 22 increase in within hospital mortality after receiving their checks these findings suggest that full wallets adversely affect some aid recipients and that policymakers should explore alternate disbursement regimes such as a staggered disbursement schedule or in kind support that have the potential to reduce the rate of adverse events

household response to government debt evidence from life insurance holdings we use state level panel data on life insurance in force in the united states and find that a 1 increase in government debt at either the state or federal level is associated with a 0 96 increase in the face value of the average life insurance holdings per capita for a household in the average state this increase represents an intention to save that would almost completely offset the government debt in specific states of the world i e if the insured dies because this state of the world is rare the immediate increase in actual savings is only about 0 03 the cost of the additional insurance we find in addition that this response occurs mainly on the intensive margin meaning that the size of the average life insurance policy increases when government debt increases along the extensive margin we find the number of policies in force falls slightly with federal debt and rises slightly with state debt increases the results show altruistic planning in response to changes in government debt that are consistent with ricardian equivalence and the long run neutrality of government debt

bounded rationality lifecycle consumption and social security abstract this paper explores an overlapping generations model of bounded rationality in which consumers only foresee the future over a subset of their life span we focus in particular on whether the model can in general equilibrium produce a hump shaped lifecycle consumption profile with a peak that matches data for the average u s consumer for a simple four period model we show that an increasing income profile along with exogenously imposed retirement are sufficient to induce a hump with no other mechanism that can account for a hump besides bounded rationality the model best fits the salient features of consumption data with a planning horizon of 20 years which is well supported by the behavioral evidence found in surveys on retirement planning finally we show that the age of the consumption peak is robust to the introduction of social security mortality risk and another species of bounded rationality quasihyperbolic discounting moreover social security can be welfare improving with a short planning horizon we can calibrate the model to jointly explain the timing of the consumption hump and the optimality of the current social security system with quasihyperbolic discounting instead we can calibrate the model so the current social security system is optimal but we cannot also account for the timing of the consumption hump if we add quasihyperbolic discounting in addition to a short planning horizon the present bias has a negligible effect in equilibrium

innocent bystanders monetary policy and inequality abstract we study the effects of monetary policy shocks on and their historical contribution to consumption and income inequality in the united states since 1980 as measured by the consumer expenditure survey contractionary monetary policy systematically increases inequality in labor earnings total income consumption and total expenditures furthermore monetary policy shocks account for a non trivial component of the historical cyclical variation in income and consumption inequality using detailed micro level data on income and consumption we document some of the different channels via which monetary policy shocks affect inequality as well as how these channels depend on the nature of the change in monetary policy

permanent income current income and consumption evidence from two panel data sets in this article i estimate euler equations that is the first order conditions of the consumers maximization problem using data from two data sets consumption data are taken from the consumer expenditure survey income data are taken from the panel study of income dynamics because the data for the estimation come from two samples i use a generalization of the instrumental variables estimator the two sample instrumental variables estimator i find evidence that consumption is excessively sensitive to predictable income growth the estimates of the coefficient of excess sensitivity for three consumption measures range from 2 to 5

measuring corruption in china an expenditure based approach using household survey data most existing micro level empirical analyses of corruption rely on administrative records special purpose surveys or field experiments which can be difficult or very costly to obtain in some situations in this paper we apply an expenditure based method of quantifying the extent of corruption in a particular country using household survey data this method utilizes discrepancies between consumption and reported income to measure corruption another contribution of this paper is that it provides the first objective estimate of the extent of corruption in china we use a quadratic clothing expenditure function to estimate the extent of corruption in china in 2002

the permanent income hypothesis and the real interest rate some evidence from panel data abstract a test of the permanent income hypothesis in panel data is formulated taking into account both the time series and cross section variation in the rate of return the over identifying restrictions of the theory rejected

are poor people credit constrained or myopic evidence from a south african panel credit constraints are an almost ubiquitous assumption in development economics yet direct evidence for credit constraints is limited and many observations consistent with credit constraints are equally compatible with myopic non forward looking consumption or precautionary saving using household panel data and a source of widely anticipated income in south africa this paper tests and rejects the standard consumption model with perfect capital markets then myopic consumption and precautionary saving are tested as alternative explanations for the observed jumps in expenditure the standard model with credit constraints cannot be rejected in favour of myopic consumption or precautionary saving

survey measures of risk aversion and prudence this paper utilizes a thought experiment conducted by the bank of italy to estimate absolute and relative risk aversion along with absolute and relative prudence for a broad cross section of italian households upper and lower bounds are calculated for each parameter and comparisons are made across socio demographic groups evidence is found of decreasing absolute risk aversion decreasing absolute prudence increasing relative risk aversion and increasing relative prudence

consumer response to tax rebates many households received income tax rebates in 2001 of 300 or 600 these rebates represented advance payments of the tax cut from the new 10 percent tax bracket based on a survey of a representative sample of households this paper finds that only 22 percent of households receiving the rebate would spent it instead they would either save it or use it to pay off debt this very low rate of spending represents a striking break with past behavior which would have suggested a much higher rate of spending the low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand this abstract was borrowed from another version of this item

household saving micro theories and micro facts in this survey we review the recent theoretical and empirical literature on household saving and consumption the discussion is structured around a list of motives for saving and how well the standard theory captures these motives we show that almost all of the motives for saving that have been suggested in the informal saving literature can be captured in the standard optimizing model particular attention is given to recent work on the precautionary motive and its implications for saving and consumption behavior we also discuss the behavioral or psychological approach that eschews the use of standard optimization techniques and focuses instead on direct consideration on saving we provide a section on facts who save and how much we then discuss informally the recent decline in the u s saving rate and whether the theory is of much use in understanding this and other changes in aggregate saving rates over time we do not find any convincing explanation for the change in saving rates we also discuss some analyses of saving behavior over the life cycle addressing such questions as whether households save enough for retirement and whether the consumption patterns of older households can be rationalized within a simple life cycle model we also review a great number of studies of the consumption euler equations based on our analysis of the studies cited we conclude that there is still mixed evidence that consumption is excessively sensitive to income we also examine in depth the recent empirical literature on the precautionary motive we conclude that although some households do seem to have a significant precautionary motive at some points in their life cycle this motive is not so strong empirically as some investigators suggest

employment prospects and the propagation of fiscal stimulus abstract this paper studies a mechanism that amplifies the effects of a rise in government purchases through private consumption fiscal stimulus increases aggregate demand boosts job creation and as a consequence improves job finding rates this in turn reduces individual unemployment risk faced by households decreases precautionary motives and crowds private spending in additionally higher job finding rates affect aggregate labor market flows which raises the ratio between employed and unemployed workers as the former feature higher spending than the latter then mechanically aggregate consumption increases a calibrated model with uninsured idiosyncratic risk frictional labor market and sticky prices is used to isolate and to quantify the joint impact of these two forces the so called employment prospects channel i find that when it is shut off the drop in the values of both impact and cumulative multipliers is substantial and ranges from 32 to 38 under various monetary and fiscal policy rules

learning ricardian equivalence abstract this paper tests whether subjects learn to comply with the ricardian equivalence proposition in a life cycle consumption laboratory experiment our results suggest that ricardian equivalence does not hold on average tax changes have a significant and strong impact on consumption choice using individual consumption time series the behaviour of 56 of our subjects can be classified as inconsistent with the ricardian equivalence proposition classifying subjects according to rules of thumb that best describe their behaviour we find that subjects switch less to rules that theoretically violate ricardian equivalence in later rounds compared to earlier rounds this implies that some subjects learn to comply with ricardian equivalence by changing their consumption strategy however the aggregate effect of taxation on consumption persists even after eight rounds of repetition

automatic stabilizers and economic crisis us vs europe this paper analyzes the effectiveness of the tax and transfer systems in the eu and the us to provide income insurance through automatic stabilization in the recent economic crisis we find that automatic stabilizers absorb 38 of a proportional income shock in the eu compared to 32 in the us in the case of an unemployment shock 47 of the shock is absorbed in the eu compared to 34 in the us this cushioning of disposable income leads to a demand stabilization of up to 30 in the eu and up to 20 in the us there is large heterogeneity within the eu automatic stabilizers in eastern and southern europe are much lower than in central and northern european countries we also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs

the reaction of household consumption to predictable changes in social security taxes the key implication of rational expectations and the basic life cycle permanent income hypothesis that predictable changes in income have no effect on the growth rate of consumption expenditures is examined this implication is important for understanding the effectiveness and optimal timing of fiscal policy the causes and propagation of business cycles and the effects of income fluctuations on the growth rate of the economy using household level consumption data from the consumer expenditure survey whether expenditures on nondurable goods increase contemporaneously with predictable changes in social security tax withholding is tested it is found that households do change their consumption expenditures in response to the predictable fluctuations in income induced by the social security tax system

consumption and income seasonality in thailand many households in developing countries rely on seasonal agriculture for their incomes this paper investigates whether household consumption expenditure tracks income across seasons using data from thailand i contrast the seasonal consumption patterns of households with different seasonal income patterns and estimate the responsiveness of seasonal consumption to seasonal income i find little evidence that consumption tracks income over the course of the year the findings suggest that observed seasonal consumption patterns are the result of seasonal variations in preferences or prices common to all households rather than an inability of households to use savings behavior to smooth consumption

the reaction of consumer spending and debt to tax rebates evidence from consumer credit data we use a new panel data set of credit card accounts to analyze how consumers responded to the 2001 federal income tax rebates we estimate the monthly response of credit card payments spending and debt exploiting the unique randomized timing of the rebate disbursement we find that on average consumers initially saved some of the rebate by increasing their credit card payments and thereby paying down debt but soon afterward their spending increased counter to the permanent income model spending rose most for consumers who were initially most likely to be liquidity constrained whereas debt declined most so saving rose most for unconstrained consumers

what do high interest borrowers do with their tax rebate building on prior literature that constrained individuals consume the most out of a tax rebate we study the tradeoffs high interest borrowers face when they received their 2008 tax stimulus checks we find a persistent decline in payday borrowing in the pay cycles that follow the receipt of the tax rebate the reduction in borrowing is a significant fraction of the mean outstanding loan 12 and appears fairly persistent over the time but is moderate in dollar magnitude about 35 relative to the size of the rebate check 600 per person in trying to reconcile this finding with the cost of not retiring expensive payday debt we find substantial heterogeneity across borrowers among individuals that we classify as temptation spenders e g those that use 400 apr loans to buy electronic goods or go on vacation we find no reduction in payday borrowing after the tax rebate is issued but this group represents only a small fraction of payday borrowers a second group for which we find no debt retirement post check is the set of borrowers that appear to use what should be short term payday loans as a long term financing solution we infer that the marginal use of the tax rebate for this group was to deal with regular monthly obligations such as paying down late utility bills or making rent payments

do consumers respond to future income shocks evidence from social security reform in taiwan abstract a prediction of the basic permanent income hypothesis life cycle model is that an unexpected increase in future income produces an immediate increase in current consumption this paper tests that prediction using data from taiwan the 1985 labor standards law granted all employees in covered industries a windfall retirement severance benefit my results indicate that consumption did not increase immediately for those who were granted the windfall relative to those who received no windfall moreover consumption for those receiving a greater windfall did not increase relative to those who were granted less

the liquid hand to mouth evidence from personal finance management software we use a very accurate panel of all individual spending income balances and credit limits from a personal finance software to document spending responses to the arrival of both regular and irregular income these payday responses are robust and homogeneous for all income and spending categories throughout the income distribution moreover we find that few people hold little or no liquidity we then analyze whether people hold liquidity cushions to cope with future liquidity constraints however we find that peoples responses are consistent with standard models without illiquid savings in which neither present nor future liquidity constraints are frequently binding received may 31 2016 editorial decision september 30 2017 by editor itay goldstein

wealth shocks unemployment shocks and consumption in the wake of the great recession we use data from the 2009 internet survey of the health and retirement study to examine the consumption impact of wealth shocks and unemployment during the great recession in the us we find that many households experienced large capital losses in housing and in their financial portfolios and that a non trivial fraction of respondents have lost their job as a consequence of these shocks many households reduced substantially their expenditures we estimate that the marginal propensities to consume with respect to housing and financial wealth are 1 and 3 3 percentage points respectively in addition those who became unemployed reduced spending by 10 percent we also distinguish the effect of perceived transitory and permanent wealth shocks splitting the sample between households who think that the stock market is likely to recover in a year s time and those who don t in line with the predictions of standard models of intertemporal choice we find that the latter group adjusted much more than the former its spending in response to financial wealth shocks

the savers spenders theory of fiscal policy the macroeconomic analysis of fiscal policy is usually based on one of two canonical models the barro ramsey model of infinitely lived families or the diamond samuelson model of overlapping generations this paper argues that neither model is satisfactory and suggests an alternative in the proposed model some consumers plan ahead for themselves and their descendants while others live paycheck to paycheck this model is easier to reconcile with the essential facts about consumer behavior and wealth accumulation and it yields some new and surprising conclusions about fiscal policy

further evidence of excess sensitivity of consumption nonseparability among goods and heterogeneity across households the standard theoretical framework for analysing households intertemporal decisions is the life cycle permanent income model among its implications testing the model allows to analyse the response of consumption to fiscal policy however the empirical literature with microdata has yielded mixed results this article examines the sensitivity of the results to the assumption of separability among goods and of homogeneity across households for that purpose we test a rational expectations permanent income model with household data drawn from the spanish family expenditure survey this survey contains detailed information on total expenditure and the income presents large exogenous quarterly changes due to an institutional feature the article shows that assuming separability among commodities biases the test against the model when separability is not imposed we show that the rejection of the model depends on heterogeneity across households in terms of their members being unemployed or not for those

a simple test of friedman s permanent income hypothesis friedman s permanent income hypothesis pih predicts that the income elasticity of consumption should be higher for households for which a large fraction of the variation of their income is permanent than for households facing more transitory variations in income we test this prediction using modern household data from the us consumer expenditure survey the results offer some support for the pih

intertemporal choice and consumption mobility the theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption not just about its conditional mean in the paper we study the empirical transition matrix of consumption using a panel drawn from the bank of italy survey of household income and wealth we estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution the transition matrix generated by our estimates matches remarkably well the empirical matrix both in the aggregate and in samples stratified by education our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis jel d52 d91 i30

intertemporal consumption and credit constraints does total expenditure respond to an exogenous shock to credit there is continuing controversy over the importance of credit constraints this paper investigates whether total household expenditure and debt is affected by an exogenous increase in access to credit provided by a credit market reform that enabled danish house owners to use housing equity as collateral for consumption loans we find that the magnitude of the response is correlated with the amount of equity released by the reform and that the effect is strongest for younger households even for this group the response was moderate the aggregate effect of the reform was significant but small

does consumption respond to predicted increases in cash hand availability evidence from the italian severance pay abstract we examine whether italian household consumption exhibits excess sensitivity to severance pay a sizable lump sum that workers receive at job termination we find no evidence of excess sensitivity of non durable expenditure to this anticipated cash in hand change

why do retired workers claim their social security benefits so early a potential explanation based on the cumulative prospect theory abstractsocial security provides longevity insurance for older americans according to expected utility theory models rational households who are not liquidity constrained should delay claiming th

shocks stocks and socks smoothing consumption over a temporary income loss we investigate how households in temporarily straitened circumstances due to an unemploy ment spell cut back on expenditures and how they spend marginal dollars of unemployment insurance ui benefit our theoretical and empirical analyses emphasize the importance of allowing for the fact that households buy durable as well as non durable goods the theoretical analysis shows that in the short run households can cut back significantly on total expenditures without a significant fall in welfare if they concentrate their budget reductions on durables we then present an empirical analysis based on a canadian survey of workers who experienced a job separation exploiting changes in the unemployment insurance system over our sample period we show that cuts in ui benefits lead to reductions in total expenditure with a stronger impact on clothing than on food expenditures our empirical strategy allows that these expenditures may be non separable from employment status the effects we find are particularly strong for households with no liquid assets before the spell started these qualitative findings are in precise agreement with the theoretical predictions jel d11 d12 d91 j65 2009 by the european economic association

cash on hand and competing models of intertemporal behavior new evidence from the labor market this paper presents new tests of the permanent income hypothesis and other widely used models of household behavior using data from the labor market we estimate the excess sensitivity of job search behavior to cash on hand using sharp discontinuities in eligibility for severance pay and extended unemployment insurance ui benefits in austria analyzing data for over one half million job losers we obtain three empirical results 1 a lump sum severance payment equal to two months of earnings reduces the job finding rate by 8 12 on average 2 an extension of the potential duration of ui benefits from 20 weeks to 30 weeks similarly lowers job finding rates in the first 20 weeks of search by 5 9 and 3 increases in the duration of search induced by the two programs have little or no effect on subsequent job match quality using a search theoretic model we show that estimates of the relative effect of severance pay and extended benefits can be used to calibrate and test a wide set of intertemporal models our estimates of this ratio are inconsistent with the predictions of a simple permanent income model as well as naive rule of thumb behavior the representative job searcher in our data is 70 of the way between the permanent income benchmark and credit constrained behavior in terms of sensitivity to cash on hand