Do household finances constrain unconventional fiscal policy?

Scott Ross Baker, Lorenz Kueng, Leslie McGranahan, Brian T. Melzer

Research output: Contribution to journalArticle

Abstract

When the zero lower bound on nominal interest rate binds, monetary policy makers may lack traditional tools to stimulate aggregate demand. We investigate whether “unconventional” fiscal policy, in the form of preannounced consumption tax changes, has the potential to meaningfully shift durables purchases intertemporally and how it is affected by consumer credit. In particular, we test whether car sales react in anticipation of future sales tax changes, leveraging 57 preannounced changes in state sales tax rates from 1999 to 2017. We find evidence for substantial tax elasticities, with car sales rising by more than 8% in the month before a 1% increase in the sales tax rate. Responses are heterogeneous across households and sensitive to supply of credit. Consumers with high credit risk scores are most able to pull purchases forward. At the same time, other effects such as customer composition and attention lead to even greater tax elasticity during recessions, despite these credit frictions. We discuss policy implications and the likely magnitudes of tax changes necessary for any substantive long-term responses.

Original languageEnglish (US)
Pages (from-to)1-32
Number of pages32
JournalTax Policy and the Economy
Volume33
Issue number1
Publication statusPublished - Jan 1 2019

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ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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