Instruments, rules and household debt: the effects of fiscal policy

Javier Andrés (javier.andres@uv.es), José Boscá and Javier Ferri

No 1401, Working Papers from International Economics Institute, University of Valencia

Abstract: In this paper, we look at the interplay between the level of household leverage in the economy and fiscal policy, the latter characterised by different combinations of instruments and rules. When the fiscal rule is defined on lump-sum transfers, government spending or consumption taxes, the impact multipliers of transitory fiscal shocks become substantially amplified in an environment of easy access to credit by impatient consumers, regardless of the primary instruments used. However, when the government reacts to debt deviations by raising distortionary taxes on income, labour or capital, the effects of household debt on the size of the impact output multipliers vanish or even reverse, no matter the primary fiscal instrument used. We also find that differences in multipliers between high and low indebtedness regimes belong basically to the short run, whereas the long-run multipliers associated with fiscal shocks are barely affected by the level of household debt in the economy. Finally, we find that fiscal shocks exert an unequal welfare effect on impatient and patient households that can even be of opposite signs. This points to non-negligible distributional impacts of alternative fiscal strategies, especially in economies with highly indebted households.

Keywords: fiscal multipliers; household debt; distortionary taxes (search for similar items in EconPapers)
JEL-codes: E24 E44 E62 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2014-10
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-pbe
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Related works:
Journal Article: Instruments, rules, and household debt: the effects of fiscal policy (2016)
Working Paper: Instruments, rules and household debt: The effects of fiscal policy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:iei:wpaper:1401

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