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

  • Javier Andrés

    (University of Valencia)

  • J.E. Boscá

    (University of Valencia)

  • Javier Ferri

    (University of Valencia)

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.

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Paper provided by International Economics Institute, University of Valencia in its series Working Papers with number 1401.

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Length: 43 pages
Date of creation: Oct 2014
Date of revision:
Handle: RePEc:iei:wpaper:1401
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