Fiscal Stimulus and Consumer Debt

Yuliya Demyanyk (), Elena Loutskina and Daniel Murphy ()

No 1620, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: In the aftermath of consumer debt-induced recession, policymakers have questioned whether fiscal stimulus is effective during the periods of high consumer indebtedness. This study empirically investigates this question. Using detailed data on Department of Defense spending for the 2006-2009 period, we document that the open-economy relative fiscal multiplier is higher in geographies with higher consumer indebtedness. The results suggest that fiscal policy can mitigate the adverse effect of consumer (over)leverage on real economic output during a recession. We then exploit detailed microdata to evaluate aggregate demand and aggregate supply-side economic mechanisms potentially underlying this result.

Keywords: Recession; fiscal stimulus (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 E62 H56 H57 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2016-08-10
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1620

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