Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore

This paper uses a unique panel dataset of consumer financial transactions to study how consumers respond to an exogenous unanticipated income shock. Consumption rose significantly after the fiscal policy announcement: during the ten subsequent months, for each dollar received, consumers on average spent 80 cents. We find a strong announcement effect — 19% of the response occurs during the first two-month announcement period via credit cards. Subsequently, consumers switched to debit cards after disbursement before finally increasing spending on credit cards in the later months. Consumers with low liquid assets or with low credit card limit experienced stronger consumption responses.

Agarwal, Sumit and Qian, Wenlan, Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore (July 4, 2014). Available at SSRN: https://ssrn.com/abstract=2245351 or http://dx.doi.org/10.2139/ssrn.2245351