Balance-sheet households and fiscal stimulus : lessons from the payroll tax cut and its expiration

Author / Creator

Sahm, Claudia R., author

Available as

Online

Summary

Balance-sheet repair drove the response of a significant fraction of households to fiscal stimulus following the Great Recession. By combining survey, behavioral, and time-series evidence on the 20...

Balance-sheet repair drove the response of a significant fraction of households to fiscal stimulus following the Great Recession. By combining survey, behavioral, and time-series evidence on the 2011 payroll tax cut and its expiration in 2013, this papers identifies and analyzes households who smooth debt repayment. These "balance-sheet households" are as prevalent as "permanent-income households," who smooth consumption in response to the temporary tax cut, and outnumber "constrained households," who temporarily boost spending. The asymmetric spending response of balance-sheet households poses challenges to standard models, but nonetheless appears important for understanding individual and aggregate responses to fiscal stimulus.

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