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Income Changes and Consumption: Evidence from the 2013 Federal Government Shutdown

Author

Listed:
  • Constantine Yannelis

    (Stanford University)

  • Scott Baker

    (Kellogg School of Management)

Abstract

We use the 2013 federal government shutdown and rich data set from an online personal finance website to study the effects of changes in income on changes in consumption. The 2013 shutdown represented a significant and unanticipated income shock for federal government workers, with no direct effect on permanent income. We exploit both the differences between unaffected state employees and affected federal employees as well as between federal employees required to remain at work and those required to stay at home. Furthermore, we are able to discern various detailed types of household spending with widely varying elasticities. We find strong evidence for excess sensitivity of consumption patterns, violating the permanent income hypothesis. We demonstrate that this decline in spending can be largely explained by credit constraints, increased home production, and changes in time allocation. The results demonstrate the importance of liquidity and behavioral responses when constructing stimulus or social insurance policy.

Suggested Citation

  • Constantine Yannelis & Scott Baker, 2015. "Income Changes and Consumption: Evidence from the 2013 Federal Government Shutdown," 2015 Meeting Papers 372, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:372
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