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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and Its Expiration
Claudia R. Sahm
Matthew D. Shapiro
Joel B. Slemrod
Abstract

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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Claudia R. Sahm & Matthew D. Shapiro & Joel B. Slemrod, Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and Its Expiration, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2015-37, 20 May 2015.
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Keywords: Fiscal stimulus; balance sheets; marginal propensity to consume; payroll tax; survey responses
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