Gizem Kosar, Davide Melcangi, Laura Pilossoph, and David Wiczer
Working Paper 2024-14
September 2024
Abstract:
Using detailed micro data, we document that households often use "stimulus" checks to pay down debt, especially those with low net wealth-to-income ratios. To rationalize these patterns, we introduce a borrowing price schedule into an otherwise standard incomplete markets model. Because interest rates rise with debt, borrowers have increasingly larger incentives to use an additional dollar to reduce debt service payments rather than consume. Using our calibrated model, we then study whether and how this marginal propensity to repay debt (MPRD) alters the aggregate implications of fiscal transfers. We uncover a trade-off between stimulus and insurance, as high-debt individuals gain considerably from transfers but consume relatively little immediately. We show how this mechanism can lower short-run fiscal multipliers but sustain aggregate consumption for longer.
JEL classification: E21, E62
Key words: marginal propensity to consume, consumption, debt, fiscal transfers
https://doi.org/10.29338/wp2024-14
The authors thank Aidan Toner-Rodgers, Michael C Gannon, and Yasin Simsek for excellent research assistance. For helpful comments, they also thank Orazio Attanasio, Adrien Auclert, David Berger, Corina Boar, Gideon Bornstein, Carlo Galli, Felicia Ionescu, Eva Janssens, Gregor Jarosch, Greg Kaplan, Igor Livshits, Kurt Mitman, Ben Moll, Monika Piazzesi, Victor Ríos-Rull, and conference and seminar participants at the NBER Summer Institute 2022, AEA Meeting 2022, BSE Summer Forum 2023, Columbia University, Queens University, UC3M, University of Copenhagen, Federal Reserve Bank of San Francisco, the Bank of Canada, the Bank of Mexico, and Danmarks Nationalbank. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Gizem Kosar, Federal Reserve Bank of New York and CESIfo; Davide Melcangi, Federal Reserve Bank of New York; Laura Pilossoph, Duke University; or David Wiczer, Federal Reserve Bank of Atlanta.
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