Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments

The 2020 CARES Act directed cash payments to households. We analyze households’ spending responses using high-frequency transaction data from a FinTech, exploring heterogeneity by income levels, recent income declines, and liquidity. Households respond rapidly to receipt of stimulus payments, with spending increasing by $0.30 per dollar of stimulus during the first month. Households with lower incomes, greater income drops, and lower levels of liquidity display stronger responses highlighting the importance of targeting. Liquidity plays the most important role, with no observed spending response for households with high levels of bank account balances. Relative to the effects of previous economic stimulus programs in 2001 and 2008, we see larger and faster effects overall, smaller increases in durables spending, and larger increases in spending on food, likely reflecting the impact of shelter-in-place orders and supply disruptions. Additionally, we see increases in payments like rents, mortgages, and credit cards reflecting a short-term debt overhang. We formally show that these differences can make direct payments less effective in stimulating aggregate consumption.