Staff Reports
What Would You Do with $500? Spending Responses to Gains, Losses, News, and Loans
Number 843
March 2018

JEL classification: D12, D14, E21

Authors: Andreas Fuster, Greg Kaplan, and Basit Zafar

We use survey questions about spending to investigate features of propensities to consume that are useful for distinguishing between consumption theories. Asking households about their intended spending under various scenarios, we find that 1) responses to unanticipated gains are vastly heterogeneous (either zero or substantially positive), 2) responses to losses are much larger and more widespread than responses to gains, and 3) even those with large responses to gains do not respond to news about future gains. These three findings suggest that limited access to disposable resources is an important determinant of spending behavior. We also find that households do not respond to the offer of a one-year interest-free loan, suggesting it is unlikely that short-term credit constraints drive high propensities to consume. Furthermore, people do cut spending in response to news about future losses, suggesting that even households with limited disposable resources are somewhat forward-looking. A calibrated two-asset life-cycle precautionary savings model can account for these features of propensities to consume, but it cannot explain the positive effect of windfall size, driven by the extensive margin, on spending responses to gains, which suggests that nonconvexities arising from durability, salience, or attention costs may also be important.

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Andreas Fuster
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Greg Kaplan
The author makes the following disclosures:
  • Current primary appointment: Professor, Department of Economics and the College, University of Chicago
  • Current additional appointments: Advisory board member, Opportunity and Inclusive Growth Institute, Federal Reserve Bank of Minneapolis; Research Council member, Becker Freidman Institute; advisory board member, NBER Macroeconomics Annual; consultant, Federal Reserve Bank of Chicago; research associate, National Bureau of Economic Research; international research fellow, Institute for Fiscal Studies
  • Previous additional appointments (last five years): Visiting professor, University of New South Wales; economic advisor, Reserve Bank of Australia; editor, Review of Economic Dynamics; consultant, Federal Reserve Bank of Philadelphia
  • Organizations from which he has received cumulative amounts ≥$10,000 in last five years: University of New South Wales; Reserve Bank of Australia; Federal Reserve Bank of Minneapolis; Center for Monetary and Financial Studies (CEMFI); United States Soccer Federation
Basit Zafar
I declare that I have no relevant or material financial interests that relate to the research described in this paper.