Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model?

Jonathan Huntley and Valentina Michelangeli

American Economic Journal: Macroeconomics, 2014, vol. 6, issue 1, 162-89

Abstract: We build a life-cycle model with earnings risk, liquidity constraints, and portfolio choice over tax-deferred and taxable assets to evaluate how household consumption changes in response to shocks to transitory anticipated income, such as the 2001 income tax rebate. Households optimally invest in tax-deferred assets, which are encumbered by withdrawal penalties, and exchange taxable precautionary savings for higher after-tax returns. The model predicts a higher marginal propensity to consume out of a rebate than is predicted by a standard frictionless life-cycle model. Liquidity-constrained households?with few financial assets or portfolios expensive to reallocate?consume a higher fraction of the rebates.

JEL-codes: D91 E21 G11 H24 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/mac.6.1.162
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Citations: View citations in EconPapers (23)

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