Mental Accounts and Consumption Sensitivity Across the Distribution of Liquid Assets

James Graham and Robert A. McDowall

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We study consumption spending responses to predictable income using household-level data from a U.S. financial institution. Even for households with large liquid asset balances, we find no spending in anticipation of income receipt, substantial spending following receipt, and significant front-loading with respect to date of receipt. To rationalize these findings, we develop a tractable model of mental accounts where consumption choices are partitioned across current income and current assets. Our model reproduces the timing, magnitude, and cross-section of consumption responses observed in the data. Finally, we use the model to study the effectiveness of targeted and untargeted fiscal stimulus policies.

Keywords: consumption; MPC; excess sensitivity; mental accounts; fiscal stimulus (search for similar items in EconPapers)
JEL-codes: E21 E62 E70 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2024-04
New Economics Papers: this item is included in nep-dge
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Working Paper: Mental Accounts and Consumption Sensitivity Across the Distribution of Liquid Assets (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2024-25

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