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Debt Burdens and the Interest Rate Response to Fiscal Stimulus: Theory and Cross-Country Evidence

Author

Listed:
  • Jorge Miranda-Pinto

    (University of Queensland)

  • Daniel Murphy

    (University of Virginia)

  • Eric Young

    (University of Virginia)

  • Kieran Walsh

    (University of Virginia)

Abstract

We document that the interest rate response to fiscal stimulus is lower in countries with high inequality. To interpret this evidence we develop a model in which households have minimum consumption constraints. In equilibrium, many households with low wealth hit this constraint and take on debt in the face of adverse shocks. Now debt-burdened, these households use additional income to deleverage. In economies with more debt-burdened households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate. Using data from the Panel Study of Income Dynamics, we show that low-wealth households behave as predicted by the model.

Suggested Citation

  • Jorge Miranda-Pinto & Daniel Murphy & Eric Young & Kieran Walsh, 2018. "Debt Burdens and the Interest Rate Response to Fiscal Stimulus: Theory and Cross-Country Evidence," 2018 Meeting Papers 936, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:936
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    Cited by:

    1. Jorge Miranda-Pinto & Daniel Murphy & Eric Young & Kieran Walsh, 2019. "Saving-Constrained Households," 2019 Meeting Papers 1456, Society for Economic Dynamics.

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