Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and Its Expiration
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.
The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Board (FRB). The authors are grateful for comments from seminar participants at the Federal Reserve Banks of New York and Boston as well as the FRB. The FRB and the Office of Tax Policy Research at the University of Michigan funded the data collection. Shapiro acknowledges additional support from the National Institute on Aging grant P01-AG026571. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.