Public debt expansions and the dynamics of the household borrowing constraint

António Antunes and Valerio Ercolani

Review of Economic Dynamics, 2020, vol. 37, 1-32

Abstract: Contrary to a well-established view, public debt expansions may tighten the household borrowing constraint over time. Within an incomplete-markets model featuring an endogenous borrowing limit, we show that plausible debt-financed fiscal policies generate such tightening through an increase in the interest rate. The tightening makes constrained agents deleverage and reinforces the precautionary saving motive of the unconstrained. This appetite for assets impacts factor prices which, in some cases, amplify the households' reactions to the policies. For example, the tightening can substantially magnify the government spending multiplier through strengthening the typical negative wealth effect on labor supply induced by the fiscal stimulus. Moreover, the tightening affects the political support to the policies mainly through price effects. (Copyright: Elsevier)

Keywords: Endogenous borrowing constraint; Government debt; Fiscal policies and multipliers; Heterogeneous households; Incomplete markets (search for similar items in EconPapers)
JEL-codes: E21 E44 E62 H60 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.red.2019.11.002

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