Household Debt and Fiscal Multipliers

Javier Andrés (), José Boscá and Javier Ferri

No 2015-01, Working Papers from FEDEA

Abstract: We study the size of government spending multipliers in a general equilibrium model with search and matching frictions in which we allow for different levels of household indebtedness. The main results of the paper are: (a) the presence of impatient households and private debt helps generate government spending multipliers greater than 1; (b) as financial conditions worsen and impatient consumers find it more difficult to borrow (i.e. in a credit crunch), the size of the government spending multiplier falls; (c) conversely, employment, vacancies and unemployment multipliers are larger when access to credit becomes more difficult; and (d) the model explains the observed pattern of responses of labour market variables, housing prices and private debt to a fiscal shock reasonably well. On these grounds it outperforms the standard model with Rule-of-Thumb consumers whose predictions for the labour market are at odds with the data.

Date: 2015-03
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (13)

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