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How do income and the debt position of households propagate fiscal stimulus into consumption?

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  • Rüth, Sebastian K.
  • Simon, Camilla

Abstract

Expansions in public spending induce a surge of private consumption that is accompanied by increasing post-tax income of households, on average, during the U.S. postwar era. Endogenously reacting income, however, appears insufficient to fully rationalize conditional co-movement of private and public spending: private spending even expands in times during which disposable income does not rise, and for medium-income household groups that do not experience income gains. Corroborating these observations, we show within a SVAR-IV framework that fiscal stimulus causally prompts households to take on more credit. This favorable debt cycle is paralleled by dropping credit rates/spreads and inflating collateral prices, e.g., real estate prices, suggesting that softening borrowing constraints support the accumulation of private debt and help rationalizing the absence of consumption crowding-out.

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  • Rüth, Sebastian K. & Simon, Camilla, 2022. "How do income and the debt position of households propagate fiscal stimulus into consumption?," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
  • Handle: RePEc:eee:dyncon:v:143:y:2022:i:c:s0165188922001610
    DOI: 10.1016/j.jedc.2022.104456
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    More about this item

    Keywords

    Government spending shock; Consumption crowding-in; Household income; Household debt; Credit spread; SVAR-IV;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G50 - Financial Economics - - Household Finance - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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