Effects of government spending shocks by household indebtedness: An OECD panel analysis

This paper examines how the macroeconomic effects of government spending shocks vary with different levels of household indebtedness, using a state-dependent panel local projection method for 26 OECD economies. Our findings indicate that the stimulative effects of government spending are more pronounced when household debt levels are low. We further classify the countries into two groups—those with international currencies and those without—and analyze how the state-dependent effects of government spending vary between these groups. The empirical results show that the impact of government spending shocks is significantly influenced by household indebtedness levels in countries with non-international currencies, whereas this dependency is much weaker in countries with international currencies. This disparity can be attributed to the interplay between consumption patterns and debt deleveraging pressures, with long-term interest rates also playing a partial role. These results also underscore a potential policy paradox, wherein the effectiveness of fiscal interventions in stimulating aggregate demand may diminish at times when elevated household indebtedness renders stimulus most necessary.