Government Investment Stimulus and Household Balance Sheet Externalities

Abstract

We document spillover effects of government policies promoting capital investment on household financial choices and wealth accumulation. Using individual-level data on employment outcomes and household balance sheets, we find that increase in accelerated depreciation limits increases the layoff probability of routine workers and reduces their stock share of liquid wealth relative to non-routine workers. Background risk due to the policy is mitigated when workers have access to generous unemployment insurance benefits. Finally, we show that such portfolio rebalancing adversely impacts investment returns and the wealth accumulation of routine workers.

Keywords: Government stimulus, investment, stock market participation, background risk, portfolio choice

JEL Classification: D14, G11, G18, G51