Stimulus through Insurance: The Marginal Propensity to Repay Debt

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Staff Reports

Stimulus through Insurance: The Marginal Propensity to Repay Debt

Number 1065
June 2023

JEL classification: E21, E62

Authors: Gizem Kosar, Davide Melcangi, Laura Pilossoph, and David Wiczer

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.

Available only in PDF

Author Disclosure Statement(s)

Gizem Koşar
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.

Davide Melcangi
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Laura Pilossoph
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.

David Wiczer
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

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