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 generally not 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 changes in transfers. The effects of temporary benefit changes, in contrast, appear small. The consumption effects of the permanent changes appear to decline at longer horizons, and there is no clear evidence of effects on production or employment.
Finally, there is strong evidence of a sharply contractionary monetary policy response to permanent benefit increases, which may account for the apparent decline of the consumption effects and their failure to spread to broader indicators of economic activity.