Consumption Response to Temporary Price Shock: Evidence from Singapore's Annual Sale Event

Exploiting a novel panel dataset of consumer financial transactions in Singapore, we examine the consumption response to an anticipated, transitory price shock generated by the nation-wide annual sale event. Consistent with theory, we find inter-temporal substitution where consumers spend less immediately before the event, and cross-categorical substitution behavior where consumers decrease spending in items unaffected by the sale event. However, liquidity constrained consumers responded to the price change with significant spending increase and little substitution behavior. Moreover, consumers pay by credit card first and switch to debit card afterwards, further highlighting the role of liquidity in understanding the consumption response.