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How do income and the debt position of households propagate fiscal stimulus into consumption?

Sebastian Rüth and Camilla Simon

Journal of Economic Dynamics and Control, 2022, vol. 143, issue C

Abstract: Expansions in public spending induce a surge of private consumption that is accompanied by increasing post-tax income of households, on average, during the U.S. postwar era. Endogenously reacting income, however, appears insufficient to fully rationalize conditional co-movement of private and public spending: private spending even expands in times during which disposable income does not rise, and for medium-income household groups that do not experience income gains. Corroborating these observations, we show within a SVAR-IV framework that fiscal stimulus causally prompts households to take on more credit. This favorable debt cycle is paralleled by dropping credit rates/spreads and inflating collateral prices, e.g., real estate prices, suggesting that softening borrowing constraints support the accumulation of private debt and help rationalizing the absence of consumption crowding-out.

Keywords: Government spending shock; Consumption crowding-in; Household income; Household debt; Credit spread; SVAR-IV (search for similar items in EconPapers)
JEL-codes: E30 E62 G50 H31 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:143:y:2022:i:c:s0165188922001610

DOI: 10.1016/j.jedc.2022.104456

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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