Instruments, rules, and household debt: the effects of fiscal policy

Javier Andrés (), José Boscá and Javier Ferri

Oxford Economic Papers, 2016, vol. 68, issue 2, 419-443

Abstract: We look at the interplay between the level of household debt and fiscal policy. When the fiscal rule is defined in lump-sum transfers, government spending or consumption taxes, the impact multipliers of fiscal shocks get substantially amplified in an environment of easy access to credit. However, when the government reacts to debt deviations by raising distortionary income taxes, the effects of debt on the size of the output multipliers vanish or even reverse. The presence of leveraged households heightens the response of consumption to fiscal shocks in two directions: the change caused by the (primary) fiscal shock and the opposite change in response to the reaction of the (secondary) instrument in the rule. The latter is stronger when distortionary taxes are used to stabilize public debt, thus reducing the overall fiscal multiplier. As a consequence, we also find non-negligible welfare and distributional effects of alternative fiscal strategies.

Date: 2016
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Working Paper: Instruments, rules and household debt: The effects of fiscal policy (2015)
Working Paper: Instruments, rules and household debt: the effects of fiscal policy (2014)
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