Consumption Responses to the Child Allowance

This paper investigates consumption responses to the child allowance benefits. Life-cycle permanent income hypothesis predicts that the responses are likely to be limited, as the increase in life-time income resulting from the benefits is small relative to other income resources. The data analysis and a review of the Japanese Family Income and Expenditure Survey generate results that are consistent with this theoretical prediction. The estimated impact on consumption ranges from 1% to 3% of the total expected benefit annually depending on specifications. Also, the distribution of financial assets suggests that most of benefits have been saved. While the child allowance hardly affects household consumption on average, households with borrowing-constraints exhibit large responses to the monthly benefit payments, and this suggests that the child allowance may mitigate such borrowing constraints. An earnings test should be applied if the government wants to more effectively assist those households with borrowing-constraints.