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

Karger, Ezra; Rajan, Aastha

doi:10.21033/wp-2020-15

Working Paper Revision

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

Abstract: We identify 22,340 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 $604, implying a marginal propensity to consume (MPC) of 50%. Consumer spending fell back to normal levels after two weeks. Stimulus recipients who live paycheck-to-paycheck spend 62% of the stimulus payment within two weeks, while recipients who save much of their monthly income spend only 35% of the stimulus payment within two weeks. 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 stimulus payments increased consumer spending by $144 billion (49% of total outlays). A stimulus bill targeted at individuals with the highest MPCs could have increased consumer spending by the same amount at a cost of only $244 billion.

Keywords: Covid-19; stimulus payments; high-frequency data; marginal propensity to consume;

JEL Classification: D04; D12; E21;

https://doi.org/10.21033/wp-2020-15