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Applied Micro Workshop – Michaela Pagel, “Borrowing in Response to Windfalls”

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Arna Olafsson and Michaela Pagel: “Borrowing in Response to Windfalls” We use high-accuracy and comprehensive transaction-level panel data containing information on all spending, income, balances, and credit limits of a representative sample of the Icelandic population. We document that the marginal propensity to consume (MPC) out of small windfalls, i.e., perfectly temporary unexpected income shocks, is larger than one for the average individual. Furthermore, we document that individuals who receive small windfalls increase their short-term unsecured consumer debt, such as overdrafts, in response. This borrowing response is prevalent for individuals having relatively little as well as a lot of liquidity, i.e., borrowing capacity. The larger-than-one MPCs are thus financed using expensive consumer debt that is then rolled over for a considerable period of time. For large windfalls we only observe small MPCs and no borrowing responses. We also document that individuals do not increase their savings in response to either small or large windfalls. Our findings point to overconsumption problems driving both high MPCs as well as large consumer debt holdings and are clean evidence against liquidity constraints as an explanation for high MPCs out of windfalls.

Event details
  • Presentation
When Jun 04, 2019
from 16:00 to 17:30
Where briq, Seminar Room 9/1.1, Schaumburg-Lippe-Straße 9
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