Fiscal stimulus plans and households' expectations

Summary

Focus

We examine how large fiscal stimulus plans influence households' expectations, particularly regarding inflation. We focus on three significant US fiscal stimulus packages that differ in size and scope, providing a diverse context for analysis: the CARES Act of 2020, the Tax Cuts and Jobs Act (TCJA) of 2017, and the American Rescue Plan (ARP) of 2021. We aim to understand how households react to fiscal policy announcements and whether their financial literacy plays a role in shaping these reactions.

Contribution

We offer a new methodology to identify key dates when public attention to fiscal policy peaks, using Google Trends data. This allows us to pinpoint moments when households are most likely to be influenced by fiscal policy news. Our focus on three diverse fiscal stimulus plans provides comprehensive insights into how different types of fiscal measures impact households' expectations. Additionally, we highlight the importance of financial literacy in determining how households adjust their expectations in response to fiscal policy announcements.

Findings

We find that public interest in a fiscal stimulus plan peaks when the plan is officially approved by Congress or signed by the President. The peak indicates the moment when households are most influenced by fiscal policy news. A key finding is that only financially literate households adjust their expectations in response to fiscal policy news, consistently raising their inflation expectations. This reaction is observed across all three stimulus plans, suggesting a common understanding among financially literate households that fiscal policy can lead to higher inflation. In addition to inflation expectations, financially literate households also anticipate higher earnings and lower unemployment. We find that, somewhat surprisingly, fiscal policy news tends to have a more substantial effect on households' inflation expectations than monetary policy news, even during significant Federal Reserve meetings.

Abstract

Fiscal decisions develop through multiple stages of political discussions and lengthy legislative processes. We propose a measure of public attention to fiscal policy news based on Google Trends and investigate the reaction of households' expectations when attention is highest. We focus on three large U.S. fiscal stimulus plans: the CARES Act, the American Rescue Plan, and the Tax Cuts and Jobs Act. We find that attention peaks when the plan is approved by Congress or signed by the President. On those dates, financially literate households significantly adjust their expectations: those of inflation and earnings increase, while those of unemployment decline.

JEL classification: E30, E40, E50, E70

Keywords: inflation expectations, fiscal policy, stimulus plans, households