How Do Income and the Debt Position of Households Propagate Public into Private Spending?
Sebastian Rüth () and
No 676, Working Papers from University of Heidelberg, Department of Economics
We study the household sector’s post-tax income and debt position as propagation mechanisms of public into private spending, in postwar U.S. data. In structural VARs, we obtain the consumption “crowding-in puzzle” for surges in public spending and show this consumption response to be accompanied by a persistent increase in disposable income. Endogenously reacting income, however, is insufficient to rationalize conditional comovement of private and public spending: once we hypothetically force (dis)aggregate measures of income to their pre-shock paths, consumption still rises. Corroborating these findings within an external-instruments-identified VAR, which constitutes an adequate laboratory for the simultaneous interplay of financial and macroeconomic time-series, we provide causal evidence of fiscal stimulus prompting households to take on more credit. This favorable debt cycle is paralleled by dropping interest rates, narrowing credit spreads, and inflating collateral prices, e.g., real estate prices, suggesting that softening borrowing constraints support the accumulation of debt and help rationalizing the absence of crowding-out.
Keywords: government spending shock; household income; household indebtedness; credit spread; external instrument; fiscal foresight (search for similar items in EconPapers)
Note: This paper is part of http://archiv.ub.uni-heidelberg.de/volltextserver/view/schriftenreihen/sr-3.html
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://nbn-resolving.de/urn/resolver.pl?urn=urn:nbn:de:bsz:16-heidok-279393 Frontdoor page on HeiDOK (text/html)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:awi:wpaper:0676
Access Statistics for this paper
More papers in Working Papers from University of Heidelberg, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Gabi Rauscher ( this e-mail address is bad, please contact ).