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

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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.

Suggested Citation

  • Gizem Koşar & Davide Melcangi & Laura Pilossoph & David Wiczer, 2023. "Not Just “Stimulus” Checks: The Marginal Propensity to Repay Debt," Liberty Street Economics 20230627, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:96390
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    File URL: https://libertystreeteconomics.newyorkfed.org/2023/06/not-just-stimulus-checks-the-marginal-propensity-to-repay-debt/
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    Keywords

    stimulus; expectations;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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