On Flucutations in the Sensitivity of Consumption Demand to Cash Flows: Evidence From Gas Prices
AbstractHow does the sensitivity of consumer demand to liquidity change over time? This paper measure<br /><br /><br />
time-variation in the spending responses of households to changes in effective cash flows using a large dataset containing every transaction into or out of linked checking, savings, and credit card accounts over 4 years. From observed spending on gasoline and its price at the state level, we calculate each household’s average weekly consumption of gasoline in gallons. From this average and state tax rates, we measure a predicted household-level change in after- gas income induced by innovations to national gas prices in every week. Controlling for the average change in spending, and thus for all channels through which gas prices might affect individuals which are uncorrelated with individual-level spending on gasoline, we estimate the partial-equilibrium impulse response of different categories of household spending to these predicted changes in effective income. We find that spending on gasoline declines over two to three weeks by 100% of the predicted change in effective income, and that spending on major categories of consumption rises to consume most of this additional cash flow over four to five weeks. Because the impulse response is primarily identified from cross-sectional variation, we characterize how the sensitivity of spending response depends on the recent history of oil price shocks and the size and sign of the change in effective cash flow. We map these changes to the changing correlation between US economic activity and gas prices during the period.