Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus: Theory and Cross-Country Evidence

Jorge Miranda-Pinto, Daniel Murphy (), Kieran James Walsh () and Eric Young
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Daniel Murphy: University of Virginia Darden School of Business
Kieran James Walsh: University of Virginia Darden School of Business

No 609, Discussion Papers Series from University of Queensland, School of Economics

Abstract: We document that the interest rate response to fiscal stimulus 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 minimum consumption threshold. 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. To validate our mechanism we confirm that the pre-Global Financial Crisis consumption response to fiscal stimulus is lower in countries with high inequality or household debt and in U.S. counties with high household debt. An implication of our theoretical and empirical results is that the sign of the debt-dependence of the effects of fiscal stimulus varies with credit conditions.

Keywords: interest rates; fiscal stimulus; household debt; inequality (search for similar items in EconPapers)
JEL-codes: D31 E21 E43 E62 H31 (search for similar items in EconPapers)
Date: 2019-04-08
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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