The Consumption Response to Liquidity-Enhancing Transfers: Evidence from Italian Earthquakes

Abstract

Exploiting three Italian earthquakes as quasi-experiments, we analyze the response of homeowners' consumption to targeted transfers, financing housing reconstruction over time. Like loans, these transfers mainly affect the liquidity of households' wealth in the short run: we show that they have no effect on consumption over a multi-year horizon. Yet, the access to reconstruction funds has significantly heterogeneous effects on impact: it strongly raises non-durable consumption by households with low liquidity and bank debt (the 'wealthy-hand-to-mouth'); it makes no difference for liquid households. Consistently, in either group, consumption is insensitive to transfer funds that accrue directly to firms.