Consumption Response to Government Income Subsidies: Korea’s Case

Abstract

The Republic of Korea Government implemented a universal consumption subsidy program to combat the coronavirus disease 2019 (COVID-19) economic downturn in 2020. Using granular, micro-level transaction data, we find that the subsidy scheme has stimulated household consumption immediately after receipt. Moreover, lower income groups demonstrate higher marginal propensity to consume than middle and higher income groups; this holds true even when creating synthetic control groups that model rational spending behavior. This can have a significant implication on the effectiveness of fiscal impulse. Using income and average historical credit card spending, we also demonstrate credit and liquidity constraints are major factors affecting consumption responses.