How Individuals Smooth Spending: Evidence from the 2013 Government Shutdown Using Account Data

Abstract

Using comprehensive account records, this paper examines how individuals adjusted spending and saving in response to a temporary drop in income due to the 2013 U.S. government shutdown. The shutdown cut paychecks by 40 % for affected employees, which was recovered within 2 weeks. Though the shock was short-lived and completely reversed, spending dropped sharply implying a näıve estimate of the marginal propensity to spend of 0.58. This estimate overstates how consumption responded. While many individuals had low liquidity, they used multiple strategies to smooth consumption including delay of recurring payments such as mortgages and credit card balances. ∗We thank Kyle Herkenhoff, Patrick Kline, Dimitriy Masterov, Melvin Stephens Jr., and Jeffrey Smith as well as participants at many seminars for helpful comments. This research is supported by a grant from the Alfred P. Sloan Foundation. Shapiro acknowledges additional support from the Michigan node of the NSF-Census Research Network (NSF SES 1131500).

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