June 2015

Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and Its Expiration

Claudia R. Sahm, Matthew D. Shapiro, and Joel Slemrod


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.

Accessible materials (.zip)

Keywords: Fiscal stimulus, balance sheets, marginal propensity to consume, payroll tax, survey responses

DOI: http://dx.doi.org/10.17016/FEDS.2015.037

PDF: Full Paper

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Last Update: June 19, 2020