Do households use “mental accounts” in making their spending decisions? Implications for macroeconomics

Do households use “mental accounts” in making their spending decisions? Implications for macroeconomics

Behavioural economics draws on insights from human psychology to understand real-world behaviours that do not conform to our standard economic models of perfectly rational, optimising agents. Macroeconomists, in particular, have only recently begun to incorporate behavioural economics into their models. In recent research, Dr Graham draws on one popular theory of behaviour to understand household spending patterns in response to the receipt of unusual income (e.g. a tax refund, or a bonus check).

In this research, Dr Graham studies household spending responses to predictable income using bank account data from a U.S. financial institution. Even for households with large bank account balances, the study finds no spending in anticipation of an income receipt, substantial spending following receipt, and significant front-loading with respect to date of receipt. These findings are all inconsistent with standard macroeconomic models where households have strong desires to smooth consumption spending over time. 

To rationalize these findings, Dr Graham develops a tractable model of "mental accounts" behaviour where consumption choices differ with respect to the use of current income or current assets. In this model, households behave as if they have an aversion to dissaving out of current asset balances. The model reproduces the timing, magnitude, and cross-section of spending responses to income receipts observed in the data. Finally, Dr Graham uses the model to study the effectiveness of fiscal stimulus policies that target spending towards low income or wealth households, in comparison to fiscal stimulus that distributes funds to all households (i.e. untargeted spending).

This event is a hybrid event and can be attended in-person or virtually.

About the Speaker

James Graham is a Senior Lecturer (i.e. Assistant Professor) in the School of Economics at the University of Sydney, Australia. James graduated with a PhD in economics from New York University in 2020. He has previously worked at the Reserve Bank of New Zealand, and held internships at the Bank of England, Federal Reserve Board of Governors, and the Federal Reserve Bank of St. Louis. His research interests are in macroeconomics with a particular interest in housing markets. He has published in the American Economic Journal: Macroeconomics, the Journal of Economic Dynamics and Control, and the Journal of Housing Economics. He is currently serving as Editor-in-Chief of the journal New Zealand Economic Papers.

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