A model of the consumption response to fiscal stimulus payments by Greg Kaplan and Giovanni L. Violante examines how households respond to tax rebates. The authors develop a structural economic model where households can hold two types of assets: a low-return liquid asset (e.g., cash, checking account) and a high-return illiquid asset (e.g., housing, retirement account). The model shows that many households, despite owning significant illiquid assets, hold little or no liquid wealth, leading to high propensities to consume transitory income and low propensities to consume news about future income. The model is parameterized to the 2001 tax rebate episode and generates consumption responses in line with empirical evidence, significantly larger than in the standard "one-asset" framework. The model's nonlinearities with respect to rebate size, phasing-out, and aggregate conditions have implications for policy design. The model explains why households with significant net worth may consume all their income each period, as the costs of accessing illiquid assets or using unsecured credit outweigh the benefits. The model's findings align with data from the Survey of Consumer Finances, showing that around 1/3 of US households fit the "wealthy hand-to-mouth" profile. The model's results suggest that fiscal stimulus payments can have strong average consumption responses, with consumption responses between 11% and 25% depending on the assumed information structure. The model also highlights the importance of considering both liquid and illiquid wealth in understanding consumption responses to fiscal stimulus payments.A model of the consumption response to fiscal stimulus payments by Greg Kaplan and Giovanni L. Violante examines how households respond to tax rebates. The authors develop a structural economic model where households can hold two types of assets: a low-return liquid asset (e.g., cash, checking account) and a high-return illiquid asset (e.g., housing, retirement account). The model shows that many households, despite owning significant illiquid assets, hold little or no liquid wealth, leading to high propensities to consume transitory income and low propensities to consume news about future income. The model is parameterized to the 2001 tax rebate episode and generates consumption responses in line with empirical evidence, significantly larger than in the standard "one-asset" framework. The model's nonlinearities with respect to rebate size, phasing-out, and aggregate conditions have implications for policy design. The model explains why households with significant net worth may consume all their income each period, as the costs of accessing illiquid assets or using unsecured credit outweigh the benefits. The model's findings align with data from the Survey of Consumer Finances, showing that around 1/3 of US households fit the "wealthy hand-to-mouth" profile. The model's results suggest that fiscal stimulus payments can have strong average consumption responses, with consumption responses between 11% and 25% depending on the assumed information structure. The model also highlights the importance of considering both liquid and illiquid wealth in understanding consumption responses to fiscal stimulus payments.