Not Just “Stimulus” Checks: The Marginal Propensity to Repay Debt

Gizem Kosar, Davide Melcangi, Laura Pilossoph and David Wiczer
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Laura Pilossoph: https://www.newyorkfed.org/research/economists/pilossoph

No 20230627, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Households frequently use stimulus checks to pay down existing debt. In this post, we discuss the empirical evidence on this marginal propensity to repay debt (MPRD), and we present new findings using the Survey of Consumer Expectations. We find that households with low net wealth-to-income ratios were more prone to use transfers from the CARES Act of March 2020 to pay down debt. We then show that standard models of consumption-saving behavior can be made consistent with these empirical findings if borrowers’ interest rates rise with debt. Our model suggests that fiscal policy may face a trade-off between increasing aggregate consumption today and assisting those with the largest debt balances.

Keywords: stimulus; expectations (search for similar items in EconPapers)
JEL-codes: D14 (search for similar items in EconPapers)
Date: 2023-06-27
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