Consumption responds to liquidity-enhancing transfers: Micro evidence from Italian earthquakes
by Antonio Acconcia, Giancarlo Corsetti e Saverio Simonelli, www.VoxEu.org
Effective fiscal stimulus: Transfers to illiquid households
Since the onset of the Great Recession, governments in advanced countries have been implementing stimulus programmes relying on fiscal transfers. The majority have been in the form of tax rebates or other measures aiming to increase households’ disposable income (Oh and Reis 2011), such as the voluntary suspension of pension contributions scheme recently introduced by the Italian government.
Fiscal transfers are successful in stimulating aggregate demand to the extent that they reach households with a high marginal propensity to consume (MPC). The long-standing question is how to identify – and to reach – the households that best qualify (Parker 2014, Jappelli and Pistaferri 2013). In line with the literature stressing credit market imperfections and precautionary saving, many empirical studies have shown that the marginal propensity to consume is higher among households with low level of ‘cash on hands’ (see, for instance, the recent study by Jappelli and Pistaferri 2014, based on survey data in Italy), and among households who are most likely to be liquidity constrained, as shown by Argarwal et al. (2007) in their study of the consumption response to the 2001 Federal income tax rebates.
A recent strand of the literature has called attention to the marginal propensity to consume of households who are relatively wealthy, but hold their wealth concentrated in assets (like housing) that are relatively illiquid. These are assets that, because of credit and financial frictions, can be used to finance current consumption only at high (transaction) costs. If borrowing against one’s house or refinancing one’s mortgage is very costly, homeowners may be discouraged from using their wealth to sustain current consumption in adverse circumstances (such as a temporary fall in income, or a surge in expenditure). When this is the case, the household can be described as ‘wealthy hand-to-mouth’ (Kaplan and Violante 2014), their consumption expenditure being quite sensitive to cash transfers that increase disposable income in the short run.
The challenge to the empirical literature is to shed light on the key mechanism supporting this conclusion, that is, on the ‘liquidity channel’ by which tax and transfers can affect demand.
The consumption response to liquidity-enhancing transfers: Evidence from Italian earthquakes
In a recent working paper (Acconcia et al. 2015), we take up the challenge of exploring micro evidence on the recent view concerning fiscal transfers.