Fiscal redistribution, household debt, and consumption: Evidence of a non-linear moderating effect

This paper examines whether fiscal redistribution moderates the consumption effects of household debt shocks and whether this moderating role is non-linear. Using panel local projection methods for 31 countries over the period 1980–2023, the analysis focuses on the household consumption channel and distinguishes between the debt-service peak phase and the subsequent labor market stress phase following a credit expansion. The results reveal a hump-shaped non-linearity in the moderating effect of overall redistribution: the stabilizing impact strengthens with redistribution intensity up to an intermediate level and weakens thereafter. While the effect is economically meaningful during the debt-service peak, it becomes statistically significant and quantitatively stronger when unemployment rises and wage growth declines, suggesting that redistribution operates primarily through income-support mechanisms. In contrast, redistribution targeted solely at the tails of the income distribution does not provide measurable stabilization of consumption. The findings highlight that the macroeconomic effectiveness of fiscal redistribution depends on both its intensity and its design, and that broad-based redistribution plays a more robust stabilizing role in the aftermath of household debt shocks.