Expenditure effects of budget transfers in the event of a pandemic
In response to the Covid-19 pandemic, many governments around the world have used direct transfers to households to generate fiscal stimulus. Similar policies had already been used during the 2001 recession and during the global crisis, where they proved effective in stimulating household spending (Johnson et al. 2006, Parker et al. 2013). However, the recession caused by the Covid-19 pandemic differs significantly from past economic downturns. Restrictions imposed by governments to slow the spread of the virus and fear of infection play a role in consumer decisions. Therefore, the question remains open whether direct transfers are working as well as they seemed to have done in previous recessions. For example, Auerbach et al. (2021) show that defense spending multipliers were positive only in cities that were not subject to containment orders. Marginal propensity to consume estimates for US Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus checks vary widely (Baker et al. 2020, Coibion et al. 2020, Parker et al. 2022 ).
A direct transfer of €450 per child
The German federal government has also introduced a direct transfer payment to households with children, the so-called “child bonus”. The intention of this policy was to cushion the strains imposed by Covid-19 restrictions on families as well as to strengthen aggregate demand. We confirm, using survey data, that households with dependent children report greater income losses at the onset of the Covid-19 pandemic. In a new study, we investigate whether the child bonus actually boosted consumption to a measurable extent and what factors influence its effectiveness (Goldfayn-Frank et al. 2022). Our study uses scanner data from the market research institute Gesellschaft für Konsumforschung (GfK), which records the daily consumption expenditure of nearly 10,000 households on non-durable goods such as food and semi- durable items such as clothing. We combine daily household expenditure data and randomly distributed child bonus payment dates to identify its effect on expenditure. Thus, we are comparing the expenditure of two households which differ only in that one has already received the child allowance while the other has not. One of the advantages of our study is that we observe the actual behavior of household spending and that we do not have to rely on surveys.
To give us a first general idea of whether the child bonus has increased consumption expenditure, in Figure 1 we compare the average monthly consumption expenditure of households with children with those of households without children between July 2020 and June 2021.
Figure 1 Monthly expenditure of households with and without children
The premium was paid in three installments: €200 per child in September 2020, €100 per child in October 2020 and €150 per child in May 2021. Looking at Figure 1, we can see a monthly increase in household expenditure with children in September 2020. In the case of households without children, on the other hand, average expenditure remained constant over the two months considered. Things are different when it comes to the second and third payment. In October 2020, the expenditures of the two groups of households follow parallel trajectories. In May 2021, households with children even spent slightly less on consumption than they did in April, while households without children spent roughly the same amount. These descriptive patterns suggest that only the first installment of the child bonus led to an increase in expenditure.
In order to more systematically assess the impact of the child bonus on household expenditure, we carry out a difference-in-differences analysis comparing households that have received the transfer with those that have not (yet) received it.1 We express our results as an estimate of the marginal propensity to consume, that is, the percentage of the transfer payment spent in the month.
Figure 2 Estimates of daily effects on total expenditure
Only the first transfer increased spending
Our analysis shows that the child bonus had a relatively small effect on household expenditure. For the first payment, we estimate a marginal propensity to consume of around 12%. In other words, out of €1 of the child premium, households spent around 12 cents in the month in which the transfer was received. As shown in Figure 2, we observe parallel spending patterns in the days leading up to the receipt of the transfer by households. In the days following receipt, treated households temporarily increase their total expenditure. The effect was concentrated in the non-durable goods category and was driven by households in districts with lower Covid-19 case rates. Households with low income or cash constraints also showed a stronger response, although only a small proportion of households report such constraints. On the other hand, households with higher savings rates reacted only weakly to the child bonus. The spending effect is not consistently linked to local labor market conditions or the stringency of local coronavirus response measures. Moreover, we do not find that there was a consumption effect caused by the announcement of the transfer. The number of household contacts due to economic activity, measured by the number of shops visited, increased due to the child bonus. Online shopping played a relatively minor role. This implies that there could also be a feedback effect of increased economic activity on infection rates. Such a mechanism is a feature of models that incorporate both macroeconomic and epidemiological dynamics (Eichenbaum et al. 2021).
At the time of the second and third transfer, infection rates were much higher
We do not identify any significant effect on expenditure for the second and third tranches of the child bonus. Taken together, this gives an aggregate marginal propensity to consume of only 5% for the three child bonus tranches added together. The lack of consumer response for the second and third transfer payments could be linked to continued high savings rates among the population as well as significantly higher infection rates in the second and third months. payments. We find no evidence that different transfer sizes play a role in explaining the null effect for these latter payments. Finally, even if spending on consumer durables and services, which are not covered by our data, were to show a similar increase, the marginal propensity to consume would still only be around 14%.
Redistribution rather than revival
Overall, the child bonus seems to have had only a limited stimulating effect on consumption. This is partly explained by the specificity of the pandemic context, which inhibits the efficiency of the transfer. Our result is consistent with the findings of Parker et al. (2022), who report a marginal propensity to consume of around 10% for economic impact payments, which were also paid out as direct transfers to US citizens in 2020. In contrast, other research showed that the temporary VAT reduction in Germany provided an effective boost to consumption (Bachmann et al. 2021). The child bonus therefore served not so much as a stabilizer of economic activity as an instrument of redistribution.
Authors’ note: The opinions expressed here do not necessarily reflect the opinion of the Deutsche Bundesbank or the Eurosystem.
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1 We use the estimator proposed by Sun & Abraham (2021) which is robust to heterogeneous treatment effects.