Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278909 
Year of Publication: 
2023
Series/Report no.: 
IZA Discussion Papers No. 16211
Publisher: 
Institute of Labor Economics (IZA), Bonn
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.
Subjects: 
marginal propensity to consume
consumption
debt
fiscal transfers
JEL: 
E21
E62
Document Type: 
Working Paper

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