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Fiscal spending multipliers over the household leverage cycle

Mathias Klein, Hamza Polattimur and Roland Winkler

European Economic Review, 2022, vol. 141, issue C

Abstract: This paper investigates household leverage-dependent fiscal policy effects in a two-agent New Keynesian DSGE model with occasionally binding borrowing constraints. Our model successfully replicates empirical evidence showing that fiscal policy’s effectiveness differs significantly across the household leverage cycle. Fiscal multipliers are persistently above unity when government spending rises at the peak of the household leverage cycle. In contrast, increases in government spending at the trough of the household leverage cycle imply fiscal multipliers below unity. We test the model’s predictions on post-WWII U.S. data.

Keywords: Occasionally binding constraints; Government spending multiplier; Household leverage cycle; State-dependence (search for similar items in EconPapers)
JEL-codes: E32 E44 E62 H31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:141:y:2022:i:c:s0014292121002671

DOI: 10.1016/j.euroecorev.2021.103989

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