Work

How Individuals Respond to a Liquidity Shock: Evidence from the 2013 Government Shutdown

Year: 2015

Type: report

Abstract: Using comprehensive account records, this paper examines how individuals adjusted spending and saving in response to a temporary drop in liquidity due to the 2013 U.S. government shutdown.The shutdown cut paychecks by 40% for affected employees, which was recovered within 2 weeks.Because the shutdown affected only the timing of payments, it provides a distinctive experiment allowing estimates of the response to a liquidity shock holding income constant.Spending dropped sharply, implying a naïve estimate of 58 cents less spending for every dollar of lost liquidity.This estimate overstates the consumption response.While many individuals had low liquid assets, they used multiple sources of short-term liquidity to smooth consumption.Sources of short-term liquidity include delaying recurring payments such as for mortgages and credit card balances.

Source: National Bureau of Economic Research

DOI: 10.3386/w21025

Authors: Michael Gelman, Shachar Kariv, Matthew Shapiro, Dan Silverman, Steven Tadelis

Institutions: National Bureau of Economic Research, University of Michigan, University of California, Berkeley, Arizona State University

Language: English

Topic: Financial Literacy, Pension, Retirement Analysis

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: green

Funders: National Science Foundation, Alfred P. Sloan Foundation