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Public debt expansions and the dynamics of the household borrowing constraint

Author

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  • Antonio Antunes

    (Banco de Portugal)

  • Valerio Ercolani

    (Banca d'Italia)

Abstract

Contrary to a well-established view, public debt expansions may tighten the household borrowing constraint over time. Within an incomplete-markets model featuring an endogenous borrowing limit, we show that plausible debt-financed fiscal policies generate such tightening through an increase in the interest rate. The tightening makes constrained agents deleverage and reinforces the precautionary saving motive of the unconstrained. This appetite for assets impacts factor prices which, in some cases, amplify the households' reactions to the policies. For example, the tightening can substantially magnify the government spending multiplier through strengthening the typical negative wealth effect on labor supply induced by the fiscal stimulus. Moreover, the tightening affects the political support to the policies mainly through price effects. (Copyright: Elsevier)

Suggested Citation

  • Antonio Antunes & Valerio Ercolani, 2020. "Public debt expansions and the dynamics of the household borrowing constraint," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 1-32, July.
    • Handle: RePEc:red:issued:18-254
    DOI: 10.1016/j.red.2019.11.002
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    6. Shvets, Serhii, 2020. "The golden rule of public finance under active monetary stance: endogenous setting for a developing economy," MPRA Paper 101232, University Library of Munich, Germany.
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    More about this item

    Keywords

    Endogenous borrowing constraint; Government debt; Fiscal policies and multipliers; Heterogeneous households; Incomplete markets;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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