Liquid Savings Research Articles

Household Cash Balances during COVID-19: A Distributional Perspective

Months after the declaration of national emergency on March 13, 2020, the COVID-19 pandemic continues to impact the economy and household finances in dramatic and unprecedented ways. Household spending, which initially fell sharply during the shutdowns in March and April (Cox et al, 2020), has slowly recovered. The most financially vulnerable families have been impacted the most, with lower-income earners and Black and Latinx workers facing the highest job losses. The government responded with the massive CARES Act to bolster income and economic activity through stimulus checks, expanded unemployment benefits, and the Payroll Protection Program. Prior research has demonstrated the importance of liquid savings for maintaining financial resilience during times of uncertainty (Farrell et al, 2019; Farrell et al, 2020). What has been the net effect of these various forces on families’ liquid savings? Aggregate statistics suggest an increase in the deposits of households and nonprofits as well as commercial banks since March, 2020, but what does the picture look like for the median household and, in particular, low-income households? We analyze trends in checking account balances between 2019 and October 2020 to understand how the pandemic and these government interventions have affected household financial outcomes across the income spectrum. As a highly liquid asset, checking accounts often serve as a family’s first line of defense to shield against financial shocks. It is also important to provide a distributional, household-centric view of account balance trends, which might be masked by aggregate public statistics on deposit levels. We address these questions via a unique data asset based on the daily balances of Chase personal checking accounts. The data asset follows the account balances of 1.8 million families across the U.S. who have been active checking account users since December 2018.

The Unemployment Benefit Boost: Initial Trends in Spending and Saving When the $600 Supplement Ended

Unemployment benefits have played an unprecedented role in the U.S. economy as a result of record high job losses and the authorization of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act authorized a $600-per-week supplement, which hugely increased the value of unemployment benefits, such that the median jobless worker received unemployment benefits equal to 145% of their pre-job loss wages compared to 50% in normal times. The $600 weekly supplement expired at the end of July, however, causing the total value of unemployment benefits paid out to fall by 52 percent between July and August. In this paper, we present evidence that the increased unemployment benefits boosted both spending and savings among the unemployed and that upon the expiration of the $600 benefit supplement in August, families receiving unemployment benefits sharply cut spending and dipped into savings. Our first finding shows that spending of the unemployed increased by 22 percent upon receipt of unemployment benefits and declined by 14 percent in August with the expiration of the $600 supplement. Our second finding shows that the unemployed roughly doubled their liquid savings over the four month period between March and July 2020 but then spent two-thirds of the accumulated savings in August alone. Eventually, without further government support or significant labor market improvements, jobless workers may exhaust their accumulated savings buffer, leaving them with a choice to further cut spending or fall behind on debt or rent payments.

Mortgage Regulation and Financial Vulnerability at the Household Level

We evaluate the impact of mortgage regulation on credit volumes, household balance sheets and the reaction to adverse economic shocks. Using a comprehensive dataset of all housing transactions in Norway matched with buyers' balance sheet information from official tax records, we identify causal effects of mortgage loan-to-value (LTV) limits. Our results show that LTV-requirements have substantial effects on credit volumes, especially on the extensive margin. As a result, such requirements contribute to dampening aggregate credit growth. We find that affected households lower their debt uptake and face lower interest expenses, thereby reducing their vulnerability to adverse shocks. However, affected households also deplete liquid assets when purchasing a home, in order to meet the new requirement. This negative effect on liquid savings persists in the years following the house purchase, suggesting that the impact on financial vulnerability at the household level is in fact ambiguous. We illustrate this further by documenting that households affected by the regulation are more likely to sell their home when becoming unemployed compared to non-affected households.

Financial Returns to Household Inventory Management

Households tend to hold substantial amounts of non-financial assets in the form of consumer goods inventories that are unobserved by traditional measures of wealth, about $1,100 on average. Households can obtain significant financial returns from shopping strategically and optimally managing these inventories. In addition, they choose to maintain liquid savings – household working capital – not just for precautionary motives but also to support this inventory management. We demonstrate that households with low levels of inventory earn high returns from investing in household working capital, well above 20%, though returns decline rapidly as inventory levels increase. We provide evidence from scanner and survey data that supports this conclusion. High returns from inventory management that are declining in wealth offer a new rationale for poorer households not to participate in risky financial markets, while wealthier households invest in both financial assets and household working capital.

FORMALIZATION OF THE MIDDLE CLASS AND ASSESSMENT OF THE DISCHARGEABILITY OF DISTRIBUTION OF SOCIAL RELATIONSHIP

Scientific research of the concept and essence of the middle class, criteria for its identification, social, economic and other characteristics of this class are relevant both for theory and practice. Substantiation of issues related to the definition and peculiarities of the formation of the middle class requires in-depth research of specialists from different research areas, and first of all specialists in the field of quantitative and qualitative methods of evaluation and analysis of the middle class who are engaged in the development of models, in particular models of distribution of elements of the society (households) according to indicators of welfare (income, liquid savings, wealth in general). In this regard, the purpose of this research is to generalize the formalization of the middle class with the help of the Lorentz function and to establish a priori estimates of the uneven distribution of the total wealth or other indicator of well-being (income, liquid savings, etc.) in the society, depending on the parameters of the middle class. The article reveals the essence of the middle class as a fundamentally important layer of the society, which has a certain (different for different societies) share of social wealth (income, liquid savings, wealth in general, etc.). The middle class is formalized with a set of parameters that identifies two points of Lorentz curve characteristic for the research society. There were established the double-ended estimate for the Gini and Robin Hood coefficients, which functionally depend on the parameters of the middle class and can be used both for the evaluation of other characteristics of the uneven distribution of social wealth, as well as for other tasks of quantitative and qualitative analysis of socio-economic structuring of the society.

Rules of Thumb in Household Savings Decisions: Estimation Using Threshold Regression

The rules of thumb offered by financial advisors regarding how much to hold in liquid reserves vary widely and usually imply far greater sums than low-income households save. This paper seeks empirically-grounded insights into the minimum liquidity buffer needed by the average low-income household. First, we document diminishing benefits to liquid savings in terms of the likelihood of experiencing financial hardship. Then, we formalize this relationship with a theory of poverty traps. Finally, to observed data, we fit a regression kink model with an unknown threshold (kink) point that must be estimated. Our key finding is that the threshold point is $2,467 with a 95% confidence interval of $1,814–$3,011 (in 2019 dollars) or roughly 1 month of income for the average low-income household – which is far less than the savings amounts implied by common rules of thumb (typically 3–6 months of income). Theoretical evidence suggests that financial advice based on an empirically-estimated threshold point is welfare enhancing for households with naive perceptions of their probability of experiencing financial problems.

Middle Class Without a Net: Savings, Financial Fragility, and Preferences Over Social Insurance

In this article, we show that it is crucial to distinguish between liquid and illiquid wealth to understand how voters form preferences toward social insurance. Many households are financially fragile despite having high incomes and wealth, because they hold little liquid savings. We hypothesize, and show empirically, that this implies that a substantial group of voters show strong support for social insurance policies despite being wealthy and having high incomes, because of their limited ability to self-insure through own savings in case of an income shock. Our empirical analysis is based on a novel dataset from Denmark, which combines administrative data with high-quality measures of individual financial assets and survey measures of political preferences. Using data for other countries from the European Social Survey, we find evidence that our results hold more generally and are not specific to the Danish context.

Money in the Bank? Assessing Families' Liquid Savings using the Survey of Consumer Finances

We estimate that sixty percent of American families have liquid savings of less than three months of their own expenses, and nearly one-quarter have less than $400. In this Note we use data from the Federal Reserve Board's triennial Survey of Consumer Finances (SCF) to directly assess American families' liquid savings.

Exploring the relationships between impatience, savings automation, and financial welfare

The Behavioral Life‐Cycle hypothesis (Thaler & Shefrin, ) models consumers as having both impatient “doer” preferences, representing their desire to spend now, and patient “planner” preferences, representing long‐run welfare considerations. The Behavioral Life‐Cycle hypothesis suggests that those with doer preferences may benefit from strategies that constrain their present behavior and promote saving for the future, like automating deposits into savings accounts. We analyze over 4,000 responses from the nationally representative National Financial Well‐Being Survey to (a) describe consumer characteristics associated with the decision to automate savings deposits, and (b) explore whether automation is related to improved financial welfare, especially for impatient consumers. We find that savings automation is positively associated with financial socialization (whether the respondent's family discussed financial matters growing up) and financial skill (the ability to act on financial knowledge). We also find that impatient consumers—relative to those with stronger planner preferences—have fewer liquid savings, lower financial well‐being, less confidence in their ability to raise $2,000, and more difficulty paying bills. However, as predicted, these differences between consumers with doer and planner preferences largely disappear for those who automate savings deposits. We discuss implications of this research for financial planners in helping clients improve financial welfare.

Entrepreneurial Investment Dynamics and the Wealth Distribution

This paper studies how entrepreneurial capital illiquidity and incomplete financial markets interact to influence entrepreneurial savings and investment behavior, and in turn shape the wealth distribution. To that end, I construct an endogenous occupational choice model, in which an entrepreneur holds two assets: liquid risk-free assets and illiquid capital. I calibrate the model to match salient facts about entrepreneurial investment drawn from a nationally representative panel survey on startups, and find that an entrepreneurship model disciplined only by microdata on investment can broadly match the high wealth dispersion in the data. I also find that entrepreneurs face severe illiquidity risk, which leads to an increase in precautionary liquid savings and an allocation of illiquid capital toward rich entrepreneurs who have low productivity. Moreover, illiquidity risk depresses overall wealth dispersion due to its distortion of the ability of high productivity entrepreneurs to efficiently accumulate wealth. Consequently, I find that a policy that taxes returns to liquid assets to provide partial insurance against illiquidity risk can be welfare improving, but also increases wealth dispersion.

Why Do Poor People Co-Hold Debt and Liquid Savings?

I examine the use of flexible savings-and-loan accounts offered by SafeSave, a microfinance institution serving poor slum dwellers in Dhaka, Bangladesh. I find that 59 per cent of the clients co-hold, meaning that they borrow at high interest rates and simultaneously hold low-yield liquid savings. Co-holders could immediately pay down, on average, 32 per cent of their debt using liquid savings and thus avoid significant interest payments. The results show that co-holders are more likely to be regular workers subject to little income uncertainty, suggesting that co-holding is not a consequence of liquidity needs. The paper discusses alternative explanations.

The Liquidity Premium: Commercial Banks versus Microfinance Institutions

Using data from Bangladesh, this article finds that the liquidity premium – the difference between the interest paid on illiquid and liquid savings accounts – is higher in commercial banks than in microfinance institutions. One possible interpretation lies in the higher prevalence of time-inconsistency among the poor. The observed difference in liquidity premia could be due to poor time-inconsistent agents willing to forgo interest on illiquid savings accounts in order to discipline their future selves.

The price of deposit liquidity: banks versus microfinance institutions

ABSTRACTUsing data from Bangladesh, this article finds that the liquidity premium – the difference between the interest paid on illiquid and liquid savings accounts – is higher in commercial banks than in microfinance institutions. One possible interpretation lies in the higher prevalence of time-inconsistency among the poor. The observed difference in liquidity premia could be due to poor time-inconsistent agents willing to forgo interest on illiquid savings accounts in order to discipline their future selves.

The surprisingly low importance of income uncertainty for precaution

While it is common to use income uncertainty to explain household saving decisions, there is much disagreement about the importance of precautionary saving. This paper suggests that income uncertainty is not an important motive for saving, although households do have other precautionary reasons to save. Using a question from the Survey of Consumer Finances that asks how much households want for precautionary purposes, this paper shows that expressed household preferences, and liquid savings, are much lower than predicted by standard modeling assumptions. Households rarely list unemployment as a reason to save. Perceived income uncertainty does not affect liquid savings or precautionary preferences. Neither does being in an occupation with higher income volatility. Instead, households seem very concerned with expenditure shocks.

The Debt Puzzle in Dhakaas Slums: Do Poor People Co-Hold for Liquidity Needs?

We observe the usage of the flexible savings-and-loan accounts offered by SafeSave, a microfinance institution serving poor slum dwellers in Dhaka, Bangladesh. We find that 59% of the clients borrow at high interest rates and simultaneously hold low-yield liquid savings. Our main finding is that this apparent behavioural anomaly cannot be attributed to liquidity needs. In contrast, we show that co-holders are more likely to be workers subject to low-income risk. An alternative explanation is that co-holders take up costly loans they do not need to escape forced solidarity vis-a-vis family members and friends.

Self-control, financial literacy & the co-holding puzzle

We use UK survey data to analyze the puzzling co-existence of high cost revolving consumer credit alongside low yield liquid savings in household balance sheets, which we name the ‘co-holding puzzle’. Approximately 12% of households in our sample co-hold, on average, £3800 of revolving consumer credit on which they incur interest charges, even though they could immediately pay down all this debt using their liquid assets. Co-holders are typically more financially literate, with above average income and education. In most estimates co-holding is also associated with impulsive spending behavior on the part of the household. Our results provide empirical support to theoretical models in which households co-hold as a means of managing self-control problems.

Vulnerability to Weather Disasters: the Choice of Coping Strategies in Rural Uganda

Helgeson, J. F., S. Dietz, and S. Hochrainer-Stigler. 2013. Vulnerability to weather disasters: the choice of coping strategies in rural Uganda. Ecology and Society 18(2): 2. https://doi.org/10.5751/ES-05390-180202

Vulnerability to Weather Disasters: The Choice of Coping Strategies in Rural Uganda

When a natural disaster hits, the affected households try to cope with its impacts. A variety of coping strategies may be employed, from reducing current consumption to disposing of productive assets. The latter strategies are especially worrisome, as they may reduce the capacity of the household to generate income in the future, possibly leading to chronic poverty. In this paper, we use the results of a household survey in rural Uganda to ask, first, what coping strategies would tend to be employed in the event of a weather disaster, second, given that multiple strategies can be chosen, in what combinations would they tend to be employed, and, third, given that asset-liquidation strategies can be particularly harmful for the future income prospects of households, what determines their uptake? Our survey is one of the largest of its kind, containing over 3000 observations garnered by local workers using smart-phone technology. We find that in this rural sample by far the most frequently reported choice would be to sell livestock. This is rather striking, since asset-based theories would predict more reliance on strategies like eating and spending less today, which avoid disposal of productive assets. It may well be that livestock are held as a form of liquid savings to, among other things, help bounce back from a weather disaster. Yet we do find that other strategies, which might undermine future prospects, are avoided, notably selling land or the home, and disrupting the children’s education. Our econometric analysis reveals a fairly rich set of determinants of different subsets of coping strategies. Perhaps most notably, households with a more educated head are much less likely to choose coping strategies involving taking their own children out of education.

Microprocessor cooling based on an intermittent multijet spray system

The power dissipation of electronic devices is reaching the limit of the cooling capacity of current heatsinks, demanding new developments in cooling technologies. Moreover, the dissipated power varies with time, reducing the efficiency of the cooling system, unless an Intelligent Thermal Management is applied. In this paper, a control strategy is devised based on the Intermittent Spray Cooling concept. A multijet atomization defined by the simultaneous impact of two jets, together with an electromechanical valve, produce an intermittent spray made of small and slow droplets, which are likely to deposit on the surface for cooling purposes. The multijet spray cooling is characterized in the transition region between non-boiling and boiling regimes. The experiments consider a maximum imposed heat dissipation of 100W in a 6.25cm2 copper plate. While the Duty Cycle (the percentage of liquid injection within the cycle time) is known as the key parameter for controlling heat transfer in Intermittent Spray Cooling, optimal cooling conditions are obtained for high injection frequencies, up to 20Hz in the present work. Also, the boiling curves presented evidence how an Intermittent Spray Cooling is able to benefit from phase-change in the non-boiling regime enhancing the evaporation in the non-injection time between consecutive cycles. The transient behaviour of the cooling process is studied through the assessment of the response time to an overshoot situation. Finally, the Intermittent Spray Cooling control strategy devised is applied to a typical processor power profile with constant and variable injection conditions, for a maximum and controllable project temperature. The results presented demonstrate how the control of the cooling process through the spray intermittency leads to an increase of the efficiency and liquid savings, demonstrating the feasibility and advantage of implementing Intermittent Spray Cooling for developing Intelligent Thermal Management.

Self-Control, Financial Literacy and the Co-Holding Puzzle

We use UK household survey data incorporating measures of financial literacy and behavioural characteristics to analyse the puzzling co-existence of high cost revolving consumer credit alongside low yield liquid savings in household balance sheets, which we term the ‘co-holding puzzle’. Approximately 20% of households in our sample co-hold, on average, £6,500 of revolving consumer credit alongside £8,000 of liquid savings. Co-holders are typically more financially literate, with above average income and education. However, we show co-holding is also associated with impulsive spending behaviour on the part of the household. Our results lend empirical support to theoretical models in which sophisticated households co-hold as a means of managing a self-control problem.