Household Debt and the Effects of Fiscal Policy

Sami Alpanda (), Melissa Song and Sarah Zubairy

No 20210928-001, Working Papers from Texas A&M University, Department of Economics

Abstract: This paper examines how the effects of government spending shocks depend on the balance-sheet position of households. Employing U.S. household survey data, we find that in response to a positive government spending shock, households with mortgage debt have a large, positive consumption response, while renters have a smaller rise in consumption. Homeowners without mortgage debt, in contrast, have an insignificant expenditure response. We consider a dynamic stochastic general equilibrium (DSGE) model with three types of households: savers who own their housing, borrowers with mortgage debt, and rule-of-thumb consumers who rent housing, and show that it can successfully account for these findings. The model suggests that liquidity constraints and wealth effects, tied to the persistence of public spending, play a crucial role in the propagation of government spending shocks. Our findings provide both empirical and theoretical support for the notion that household mortgage debt position plays an important role in the transmission mechanism of fiscal policy.

Keywords: Fiscal shocks; Government spending; Household balance sheets; Household debt. (search for similar items in EconPapers)
JEL-codes: E21 E32 E62 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2021-09-28
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-dge, nep-fdg, nep-mac, nep-ore and nep-ure
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Citations: View citations in EconPapers (3)

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