Fiscal Stimulus and Consumer Debt

59 Pages Posted: 12 Aug 2016 Last revised: 29 May 2018

See all articles by Yuliya S. Demyanyk

Yuliya S. Demyanyk

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Elena Loutskina

University of Virginia - Darden School of Business

Daniel Murphy

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 11, 2018

Abstract

In the aftermath of the consumer debt–induced recession, policymakers have questioned whether fiscal stimulus is effective during periods of high consumer indebtedness. This study empirically investigates this question. Using detailed data on Department of Defense spending for the 2007–2009 period, we document that the open-economy relative fiscal multiplier is higher in geographies with higher consumer debt. The results suggest that, in the short term (2007–2009), fiscal policy can mitigate the adverse effect of consumer (over)leverage on real economic output during a recession. We then exploit detailed microdata to show that both heterogeneous marginal propensities to consume and slack-driven economic mechanisms contribute to the debt-dependent multiplier.

Keywords: Fiscal Stimulus; Consumer Debt; Defense Spending; Excess Capacity

JEL Classification: E21; E32; E44; E62; H56; H57

Suggested Citation

Demyanyk, Yuliya S. and Loutskina, Elena and Murphy, Daniel, Fiscal Stimulus and Consumer Debt (April 11, 2018). Darden Business School Working Paper No. 2819990. Available at SSRN: https://ssrn.com/abstract=2819990 or http://dx.doi.org/10.2139/ssrn.2819990

Yuliya S. Demyanyk

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

Research Department
East 6th & Superior
Cleveland, OH 44101-1387
United States

HOME PAGE: http://www.ydemyanyk.com

Elena Loutskina

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)

Daniel Murphy (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
208
rank
136,230
Abstract Views
1,591
PlumX Metrics