Fiscal Stimulus and Consumer Debt
48 Pages Posted: 18 Sep 2016 Last revised: 1 Nov 2017
Date Written: August 10, 2016
In the aftermath of consumer debt-induced recession, policymakers have questioned whether fiscal stimulus is effective during the periods of high consumer indebtedness. This study empirically investigates this question. Using detailed data on Department of Defense spending for the 2006-2009 period, we document that the open-economy relative fiscal multiplier is higher in geographies with higher consumer indebtedness. The results suggest that fiscal policy can mitigate the adverse effect of consumer (over)leverage on real economic output during a recession. We then exploit detailed microdata to evaluate aggregate demand and aggregate supply-side economic mechanisms potentially underlying this result.
JEL Classification: E62, E21, E32, E44, H56, H57
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