A Model of the Consumption Response to Fiscal Stimulus Payments

  title={A Model of the Consumption Response to Fiscal Stimulus Payments},
  author={Greg Kaplan and Giovanni L. Violante},
  journal={Microeconomics: Life Cycle Models \& Behavioral Life Cycle Models eJournal},
  • Greg Kaplan, G. Violante
  • Published 2011
  • Economics
  • Microeconomics: Life Cycle Models & Behavioral Life Cycle Models eJournal
A wide body of empirical evidence, based on randomized experiments, finds that 20-40 percent of fiscal stimulus payments (e.g. tax rebates) are spent on non-durable household consumption in the quarter that they are received. We develop a structural economic model to interpret this evidence. Our model integrates the classical Baumol-Tobin model of money demand into the workhorse incomplete-markets life-cycle economy. In this framework, households can hold two assets: a low-return liquid asset… Expand
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