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Public debt expansions and the dynamics of the household borrowing constraint

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  • António R. Antunes
  • Valerio Ercolani

Abstract

We show that the endogeneity of the household borrowing constraint accounts for a sizeable part of the effects in output, credit and welfare of fiscal policies that entail government debt expansions, using an incomplete-markets model featuring heterogeneous agents. These policies make the borrowing constraint tighter because of a higher interest rate. The tightening favors a deleveraging process in terms of private credit and reinforces the precautionary saving motive. This in turn exerts a downward pressure on the interest rate, dampening the tightening itself. As an example, under a plausible debt-financed transfers policy, the majority of households supports the policy within our baseline economy with the endogenous borrowing constraint, whereas it is against the policy if the endogeneity of the borrowing limit is not considered.

Suggested Citation

  • António R. Antunes & Valerio Ercolani, 2016. "Public debt expansions and the dynamics of the household borrowing constraint," Working Papers w201618, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201618
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    Cited by:

    1. Pedro Brinca & Miguel H. Ferreira & Francesco Franco & Hans A. Holter & Laurence Malafry, 2017. "Fiscal Consolidation Programs and Income Inequality," CeBER Working Papers 2017-11, Centre for Business and Economics Research (CeBER), University of Coimbra.
    2. Javier Andres & Jose E. Bosca & Javier Ferri & Cristina Fuentes-Albero, 2018. "Household's Balance Sheets and the Effect of Fiscal Policy," Finance and Economics Discussion Series 2018-012, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    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
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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