Public debt, iMPCs & fiscal policy transmission

Stefano Grancini

No 3106, Working Paper Series from European Central Bank

Abstract: This paper investigates the relationship between public debt and the effectiveness of fiscal policy, presenting evidence of an inverse relationship between government debt and fiscal multipliers. To explain the results, I develop and calibrate a HANK model tailored to the U.S. economy. The model reveals that higher public debt diminishes fiscal multipliers by making households less constrained. Theoretically, I show intertemporal marginal propensities to consume (iMPCs) are sufficient statistics of public debt, influencing fiscal multipliers. Decomposing changes in iMPCs into components driven by wealth distribution and the policy function, I find that the primary factor driving variations in iMPCs is the change in interest rates due to the variation of government bonds. This highlights a novel mechanism: even in the absence of fiscal limits or crowding out, large stocks of debt can weaken fiscal stimulus through their effect on household behavior. JEL Classification: E21, E62, E43, D31, D52

Keywords: consumption heterogeneity; fiscal multipliers; government bonds; interest rates; wealth effects (search for similar items in EconPapers)
Date: 2025-09
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253106

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