James Graham, University of Sydney -Mental accounts and consumption behaviour across the distribution of liquid assets

Title: Mental accounts and consumption behaviour across the distribution of liquid assets

Abstract: We study consumption responses to predictable income using transaction-level data from a U.S. financial institution. We find that consumption responses are front-loaded to income receipt, decline moderately with liquidity, but are significant even for households with substantial liquid assets. To rationalize these facts, we develop a model of mental accounts in which consumption choices are partitioned across current income and current assets. Our calibration suggests households are moderately averse to dissaving out of assets, which generates the timing and distribution of consumption responses observed in the data. Finally, we explore implications of the model for the design of fiscal policy.

Presenter: James Graham, University of Sydney

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