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

Author

Listed:
  • Javier Andrés

    (University of Valencia)

  • J.E. Boscá

    (University of Valencia)

  • Javier Ferri

    (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.

Suggested Citation

  • Javier Andrés & J.E. Boscá & Javier Ferri, 2014. "Instruments, rules and household debt: the effects of fiscal policy," Working Papers 1401, International Economics Institute, University of Valencia.
  • Handle: RePEc:iei:wpaper:1401
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    Cited by:

    1. Fujisaki, Seiya, 2016. "Macroeconomic Effect of Consumption Tax on ”Dynamic” and ”Myopic” Agents," MPRA Paper 73500, University Library of Munich, Germany.
    2. Javier Andrés & José E. Boscá & Javier Ferri & Cristina Fuentes‐Albero, 2022. "Households' Balance Sheets and the Effect of Fiscal Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(4), pages 737-778, June.
    3. Kim, Wongi, 2023. "Private sector debt overhang and government spending multipliers: Not all debts are alike," European Economic Review, Elsevier, vol. 154(C).

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    More about this item

    Keywords

    fiscal multipliers; household debt; distortionary taxes;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • 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

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