How individuals respond to a liquidity shock: Evidence from the 2013 government shutdown

Michael Gelman, Shachar Kariv, Matthew D. Shapiro, Daniel Silverman, Steven Tadelis

Research output: Contribution to journalArticle

Abstract

Using comprehensive account records, this paper examines how individuals adjusted spending and saving in response to a temporary drop in liquidity due to the 2013 U.S. government shutdown. The shutdown cut paychecks by 40% for affected employees, which was recovered within 2 weeks. Because the shutdown affected only the timing of payments, it provides a distinctive experiment allowing estimates of the response to a liquidity shock holding income constant. Spending dropped sharply, implying a naïve estimate of 58 cents less spending for every dollar of lost liquidity. This estimate overstates the consumption response. While many individuals had low liquid assets, they used multiple sources of short-term liquidity to smooth consumption. Sources of short-term liquidity include delaying recurring payments such as for mortgages and credit card balances.

Original languageEnglish (US)
JournalJournal of Public Economics
DOIs
Publication statusAccepted/In press - Jan 1 2018

    Fingerprint

Keywords

  • Account data
  • Consumption
  • Fiscal policy
  • Liquidity
  • Marginal propensity to spend
  • Naturally-occurring data
  • Spending

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this