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Fiscal Policy as an Anchor in Household Debt Cycles: Evidence from Spain

Author

Listed:
  • Mónica Edreira-Viqueira

    (Department of Economics, University of A Coruna, A Coruña, Spain)

  • David Peón-Pose

    (Department of Business and CISPAC, University of A Coruna, A Coruña, Spain)

  • Laura Varela-Candamio

    (Department of Economics & Economics and Business Administration for Society (ECOBAS), University of A Coruna, A Coruña, Spain)

Abstract

This paper examines the relationship between Spanish GDP and household debt from a business cycle perspective, with a particular focus on the role of government spending. According to Minsky's Financial Instability Hypothesis (FIH), an over-indebted economy becomes highly vulnerable to exogenous shocks. Using a Vector Error Correction Model (VECM) that includes public expenditure, investment and household net worth as control variables for Spain over the period 1999-2017, the findings indicate that although the expansion of household debt favoured economic growth, there is not enough evidence to argue for a balance between household debt and GDP. Instead, while household debt bears much of the short-term adjustment toward GDP’s long-run equilibrium, government expenditure emerges as the key determinant of the long-run equilibrium. Household debt mainly operates through short-run and error-correction channels, underscoring the importance of countercyclical fiscal policy as a key buffer during periods of household deleveraging.

Suggested Citation

  • Mónica Edreira-Viqueira & David Peón-Pose & Laura Varela-Candamio, 2026. "Fiscal Policy as an Anchor in Household Debt Cycles: Evidence from Spain," Economic Research Guardian, Mutascu Publishing, vol. 16(1), pages 2-33, June.
    • Handle: RePEc:wei:journl:v:16:y:2026:i:1:p:2-33
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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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