Do Household Finances Constrain Unconventional Fiscal Policy?

37 Pages Posted: 9 Oct 2018 Last revised: 4 May 2020

See all articles by Scott R. Baker

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance

Lorenz Kueng

University of Lugano - Faculty of Economics; Swiss Finance Institute; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Northwestern University - Kellogg School of Management

Leslie McGranahan

Federal Reserve Bank of Chicago

Brian Melzer

Federal Reserve Bank of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: October 24, 2018

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 pre-announced 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 pre-announced changes in state sales tax rates from 1999-2017. We find evidence for substantial tax elasticities, with car sales rising by over 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 an even larger 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.

Keywords: consumer durables, counter-cyclical fiscal policy, intertemporal substitution

JEL Classification: D12, E21, G01, G11, H31

Suggested Citation

Baker, Scott R. and Kueng, Lorenz and McGranahan, Leslie and Melzer, Brian, Do Household Finances Constrain Unconventional Fiscal Policy? (October 24, 2018). Swiss Finance Institute Research Paper No. 20-32, Available at SSRN: https://ssrn.com/abstract=3249858 or http://dx.doi.org/10.2139/ssrn.3249858

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance ( email )

Evanston, IL 60208
United States

Lorenz Kueng (Contact Author)

University of Lugano - Faculty of Economics

Via Giuseppe Buffi 13
Lugano, TI 6904
Switzerland

HOME PAGE: http://www.usi.ch/en

Swiss Finance Institute

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

HOME PAGE: http://www.sfi.ch/en/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://cepr.org/

Northwestern University - Kellogg School of Management

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Evanston, IL 60208
United States
+1 (847) 491-7843 (Phone)
+1 (847) 491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/

Leslie McGranahan

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-5023 (Phone)
312-322-2357 (Fax)

Brian Melzer

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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