EconPapers    
Economics at your fingertips  
 

Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus

Jorge Miranda-Pinto (), Daniel Murphy (), Kieran Walsh and Eric Young ()

No 202007, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We document that the interest rate response to fiscal stimulus (IRRF) is lower in countries with high inequality or high household debt. To interpret this evidence we develop a model in which households take on debt to maintain a consumption threshold (saving constraint). Now debt-burdened, these households use additional income to deleverage. In economies with more debt-burdened households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate. Our theoretical framework predicts that the negative relationship between the IRRF and debt only holds when credit is not restricted. It also predicts that the consumption response to fiscal stimulus is falling in debt and inequality (only during periods of relaxed credit). We perform a series of empirical tests and find support for these predictions. In doing so, we provide context to recent evidence on the debt-dependent effects of government spending by highlighting that the relationship between debt and fiscal effects varies with credit conditions.

Keywords: household debt; fiscal stimulus; interest rates; inequality (search for similar items in EconPapers)
JEL-codes: D31 E21 E43 E62 H31 (search for similar items in EconPapers)
Pages: 45
Date: 2020-02-27
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://doi.org/10.26509/frbc-wp-202007 Full Text

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:87537

Ordering information: This working paper can be ordered from

DOI: 10.26509/frbc-wp-202007

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2021-03-01
Handle: RePEc:fip:fedcwq:87537