From the early 1950s to the early 1990s, increases in Social Security benefits in the
United States varied widely in size and timing, and were only rarely undertaken in
response to short-run macroeconomic developments. This paper uses these benefit
increases to investigate the macroeconomic effects of changes in transfer payments.
It finds a large, immediate, and statistically significant response of consumption to
permanent benefit increases. The response appears to decline after about six months,
however, and there is no clear evidence of effects on industrial production or
employment. These effects differ decidedly from the effects of relatively exogenous
tax changes: the impact of transfers is faster, but much less persistent and much
smaller overall. Finally, we find strong statistical and narrative evidence of a sharply
contractionary monetary policy response to permanent benefit increases that is not
present for tax changes. This may account for the lower persistence of the
consumption effects of transfers and their failure to spread to broader indicators of
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