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A Tale of Two Stimulus Payments:2001 vs 2008
American Economic Associa-on Annual Mee-ng January 5, 2013
Greg Kaplan Princeton University & NBER
Gianluca Violante New York University, CEPR & NBER
Greg Kaplan & Gianluca Violante, 2013
Fiscal stimulus payments
• Small, anticipated, temporary, (almost) lump-sum payments
• Frequently used instrument to stimulate spending during recessions
Two recent episodes:
• 2001 (EGTRRA): $38b total payout, 1.7% quarterly GDP
• 2008 (ESA): $79b total payout, 2.2% quarterly GDP
Two objectives:
1. Alleviate household economic hardship 2. First-round impulse to fiscal multiplier
Greg Kaplan & Gianluca Violante, 2013
Empirical evidence
• Exploit randomization in timing of receipt stimulus payments to estimate consumption responses
• 2001 (EGTRRA): Johnson et al. (2006, JPS) • 2008 (ESA): Parker et al. (2013, PJSM)
• Findings for non-durable consumption:
• Strong response: around 25% spent in quarter of receipt • Smaller point estimates in 2008: around 5pp lower
Greg Kaplan & Gianluca Violante, 2013
Challenge for standard theory Permanent Income Hypothesis (PIH) • Zero response to anticipated transitory windfall
Greg Kaplan & Gianluca Violante, 2013
Challenge for standard theory Permanent Income Hypothesis (PIH) • Zero response to anticipated transitory windfall
Standard Incomplete Markets Model (SIM) • Consumption response from liquidity constrained households • Disciplined by data on net worth • <10% households constrained èrebate coefficient < 5%
Greg Kaplan & Gianluca Violante, 2013
Challenge for standard theory Permanent Income Hypothesis (PIH) • Zero response to anticipated transitory windfall
Standard Incomplete Markets Model (SIM) • Consumption response from liquidity constrained households • Disciplined by data on net worth • <10% households constrained èrebate coefficient < 5%
Kaplan and Violante (2013) (KV13) • 2 asset model with transaction costs • Generates wealthy hand-to-mouth households • Disciplined by data on liquid and illiquid assets • Parameterized to match 2001 SCF data èrebate coefficients
closer to empirical estimates of JPS
Greg Kaplan & Gianluca Violante, 2013
Our objective
Use KV13 framework to shed light on the difference between the consumption responses to the fiscal stimulus policies of 2001 and 2008, as measured by JPS and PJSM
Greg Kaplan & Gianluca Violante, 2013
2001 vs 2008: 5 key differences
2001 2008
Design of policy
D1: Payment size $500 $1000
D2: Phasing out
D3: Minimum income
Economic Environment
E1: Tax reform
E2: Size of recession
Greg Kaplan & Gianluca Violante, 2013
2001 vs 2008: 5 key differences
2001 2008
Design of policy
D1: Payment size $500 $1000
D2: Phasing out none starting at $75K
D3: Minimum income
Economic Environment
E1: Tax reform
E2: Size of recession
Greg Kaplan & Gianluca Violante, 2013
2001 vs 2008: 5 key differences
2001 2008
Design of policy
D1: Payment size $500 $1000
D2: Phasing out none starting at $75K
D3: Minimum income none at least $3K
Economic Environment
E1: Tax reform
E2: Size of recession
Greg Kaplan & Gianluca Violante, 2013
2001 vs 2008: 5 key differences
2001 2008
Design of policy
D1: Payment size $500 $1000
D2: Phasing out none starting at $75K
D3: Minimum income none at least $3K
Economic Environment
E1: Tax reform Bush tax cuts none
E2: Size of recession
Greg Kaplan & Gianluca Violante, 2013
2001 vs 2008: 5 key differences
2001 2008
Design of policy
D1: Payment size $500 $1000
D2: Phasing out none starting at $75K
D3: Minimum income none at least $3K
Economic Environment
E1: Tax reform Bush tax cuts none
E2: Size of recession short and shallow long and deep
Greg Kaplan & Gianluca Violante, 2013
Model • Baumol-Tobin model of money demand integrated into a partial
equilibrium, life-cycle, incomplete markets economy
• Finite horizon
• Idiosyncratic fluctuating labor income while working • Social security benefits when retired
• Epstein-Zin-Weil preferences defined over
• Non-durable consumption • Housing services
• Two assets:
• Liquid asset with low return (rm) • Illiquid with higher return (ra) and housing service flow (³)
• Depositing or withdrawing from illiquid asset requires paying a fixed transaction cost (·)
• Unsecured borrowing in liquid asset at rate rb > rm
Greg Kaplan & Gianluca Violante, 2013
Parameterization
Preference and risk parameters as in KV13 (2001 steady-state):
• CRRA = 4 • IES = 1.5 • Discount factor (¯) to match median illiquid wealth • Earnings risk is unit-root
Greg Kaplan & Gianluca Violante, 2013
Parameterization
Real asset returns (after tax, annual) as in KV13:
• Liquid assets: cash; money market, checking, savings and call accounts; directly held mutual funds, stocks, bonds, T-bills; net of revolving debt on credit card balances: –1.48%
• Illiquid assets: net housing wealth, retirement accounts, life
insurance, CDs and savings bonds: 2.29%
• Housing service flow: maintenance, insurance, property taxes, interest; imputed rent, tax deductability: 4% of stock
Greg Kaplan & Gianluca Violante, 2013
Parameterization
Transaction cost (·) and borrowing rate (rb)
• Match fraction of wealthy and poor hand-to-mouth (2001 SCF)
• In KV13 outline strategy for identifying a lower bound:
• 20% - 40% of US households are hand-to-mouth • 1/3 of these are poor, 2/3 are wealthy
• Target upper end of range: · = $1000 and rb=15.5%
• In KV13 we target middle of range: · = $1000 and rb=10%
Greg Kaplan & Gianluca Violante, 2013
Experiment
• Replicate 2001 tax rebate episode in model
• Economy is in steady-state when hit with three pieces of news:
1. Recession of depth and length of 2001 downturn 2. Tax reform that mimics EGTRRA 3. $500 tax rebate to half the population immediately, and to
half the population in the following quarter
• Compute transition and run JPS/PJSM regressions on model-generated panel data to compute rebate coefficients
• Repeat experiment with 5 differences for 2008
Greg Kaplan & Gianluca Violante, 2013
Model rebate coefficients: 2001 vs 2008
Baseline calibration · = $1000 rm = 15.5%
KV13 calibration · = $1000 rm = 10%
2001 0.271
Design of policy
D1: Payment size
D2: Phasing out
D3: Minimum income
Economic Environment
E1: Tax reform
E2: Size of recession
2008: D1+D2+D3 + E1+E2
Greg Kaplan & Gianluca Violante, 2013
Model rebate coefficients: 2001 vs 2008
Baseline calibration · = $1000 rm = 15.5%
KV13 calibration · = $1000 rm = 10%
2001 0.271
Design of policy
D1: Payment size 0.178
D2: Phasing out
D3: Minimum income
Economic Environment
E1: Tax reform
E2: Size of recession
2008: D1+D2+D3 + E1+E2
Greg Kaplan & Gianluca Violante, 2013
Model rebate coefficients: 2001 vs 2008
Baseline calibration · = $1000 rm = 15.5%
KV13 calibration · = $1000 rm = 10%
2001 0.271
Design of policy
D1: Payment size 0.178
D2: Phasing out 0.271
D3: Minimum income
Economic Environment
E1: Tax reform
E2: Size of recession
2008: D1+D2+D3 + E1+E2
Greg Kaplan & Gianluca Violante, 2013
Model rebate coefficients: 2001 vs 2008
Baseline calibration · = $1000 rm = 15.5%
KV13 calibration · = $1000 rm = 10%
2001 0.271
Design of policy
D1: Payment size 0.178
D2: Phasing out 0.271
D3: Minimum income 0.265
Economic Environment
E1: Tax reform
E2: Size of recession
2008: D1+D2+D3 + E1+E2
Greg Kaplan & Gianluca Violante, 2013
Model rebate coefficients: 2001 vs 2008
Baseline calibration · = $1000 rm = 15.5%
KV13 calibration · = $1000 rm = 10%
2001 0.271
Design of policy
D1: Payment size 0.178
D2: Phasing out 0.271
D3: Minimum income 0.265
Economic Environment
E1: Tax reform 0.241
E2: Size of recession
2008: D1+D2+D3 + E1+E2
Greg Kaplan & Gianluca Violante, 2013
Model rebate coefficients: 2001 vs 2008
Baseline calibration · = $1000 rm = 15.5%
KV13 calibration · = $1000 rm = 10%
2001 0.271
Design of policy
D1: Payment size 0.178
D2: Phasing out 0.271
D3: Minimum income 0.265
Economic Environment
E1: Tax reform 0.241
E2: Size of recession 0.309
2008: D1+D2+D3 + E1+E2
Greg Kaplan & Gianluca Violante, 2013
Model rebate coefficients: 2001 vs 2008
Baseline calibration · = $1000 rm = 15.5%
KV13 calibration · = $1000 rm = 10%
2001 0.271
Design of policy
D1: Payment size 0.178
D2: Phasing out 0.271
D3: Minimum income 0.265
Economic Environment
E1: Tax reform 0.241
E2: Size of recession 0.309
2008: D1+D2+D3 + E1+E2 0.187
Greg Kaplan & Gianluca Violante, 2013
Model rebate coefficients: 2001 vs 2008
Baseline calibration · = $1000 rm = 15.5%
KV13 calibration · = $1000 rm = 10%
2001 0.271 0.150
Design of policy
D1: Payment size 0.178 0.119
D2: Phasing out 0.271 0.150
D3: Minimum income 0.265 0.136
Economic Environment
E1: Tax reform 0.241 0.163
E2: Size of recession 0.309 0.184
2008: D1+D2+D3 + E1+E2 0.187 0.108
Greg Kaplan & Gianluca Violante, 2013
Conclusions
• Use KV13 framework to shed light on differences in consumption responses to the fiscal stimulus policies of 2001 and 2008
• 3 differences in policy design • 2 difference in economic environment
• Combined effect: consumption response lower in 2008 by 1/3
• Most important effect is the larger average payments in 2008
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