Saving constraints, inequality, and the credit market response to fiscal stimulus

Jorge Miranda-Pinto, Daniel Murphy, Kieran James Walsh and Eric Young

European Economic Review, 2023, vol. 151, issue C

Abstract: We document substantial heterogeneity in the interest rate response to fiscal stimulus (IRRF) across OECD economies. The IRRF is negative in half of the OECD countries, and it declines with income inequality. To interpret this evidence we develop a model in which moderately-low-income households take on debt to maintain a consumption threshold (effectively a saving constraint). Now burdened with debt, these households use additional income to deleverage. In more unequal economies with more saving-constrained households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate.

Keywords: Interest rates; Fiscal stimulus; Household debt; Inequality (search for similar items in EconPapers)
JEL-codes: D31 E21 E43 E62 H31 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Saving Constraints, Inequality, and the Credit Market Response to Fiscal Stimulus (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:151:y:2023:i:c:s0014292122002355

DOI: 10.1016/j.euroecorev.2022.104355

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