Economic stimulus refers to monetary and fiscal policy that a government implements to try to get out of a recession or other economic slowdown. It can take the form of lowering income taxes or increasing spending on infrastructure projects or other items, such as providing unemployment assistance. It can also be achieved by increasing the money supply or engaging in quantitative easing (QE), whereby the central bank buys government bonds and thus increases the amount of cash available to banks, encouraging them to lend and invest.
Economists have a lot of different opinions about the effectiveness of economic stimulus packages. Some believe that the lowering of income taxes will increase disposable income and lead people to spend more. Others believe that higher government spending can help stimulate the economy, particularly if it is targeted at low-income households, which have a greater marginal propensity to consume.
What is clear is that targeting is critical. In the case of households, it is important that the stimulus targets those who will respond by raising their spending and adding to gross domestic product in the short run. The best way to do this is to target families who are living below the poverty line and have a high marginal propensity to consume.
The COVID-19 pandemic prompted Congress to send trillions of dollars to households in the form of Economic Impact payments, commonly known as “stimulus checks”. In order to understand how these dollars are spent and their effect on household spending and economic growth, a research team from the University of California, Berkeley, fed pre-pandemic data into a model that looked at how households, regions and industries responded to a $1 change in income.