Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments

The 2020 CARES Act directed large cash payments to households. We analyze house-holds’ spending responses using high-frequency transaction data from a Fintech non-profit, exploring heterogeneity by income levels, recent income declines, and liquidity as well as linked survey responses about economic expectations. Households respond rapidly to the receipt of stimulus payments, with spending increasing by $0.25-$0.40 per dollar of stimulus during the first weeks. Households with lower incomes, greater income drops, and lower lev-els of liquidity display stronger responses highlighting the importance of targeting. Liquidity plays the most important role, with no significant spending response for households with large checking account balances. Households that expect employment losses and benefit cuts dis-play weaker responses to the stimulus. Relative to the effects of previous economic stimulus programs in 2001 and 2008, we see faster effects, smaller increases in durables spending, larger increases in spending on food, and substantial increases in payments like rents, mortgages, and credit cards reflecting a short-term debt overhang. We formally show that these differences can make direct payments less effective in stimulating aggregate consumption.