Saving Constraints, Inequality, and the Credit Market Response to Fiscal Stimulus

54 Pages Posted: 6 Apr 2019 Last revised: 7 Dec 2022

See all articles by Jorge Miranda-Pinto

Jorge Miranda-Pinto

University of Queensland

Daniel Murphy

University of Virginia - Darden School of Business

Kieran James Walsh

ETH Zürich - KOF Swiss Economic Institute

Eric R. Young

University of Virginia

Multiple version iconThere are 2 versions of this paper

Date Written: November 22, 2022

Abstract

We document substantial heterogeneity in the interest rate response to fiscal stimulus (IRRF) across OECD economies. The IRRF is negative in half of the OECD countries, and it declines with income inequality. To interpret this evidence we develop a model in which moderately-low-income households take on debt to maintain a consumption threshold (effectively a saving constraint). Now burdened with debt, these households use additional income to deleverage. In more unequal economies with more saving-constrained households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate.

Keywords: interest rates, fiscal stimulus, household debt, inequality

JEL Classification: E62, E43, E21, D31, H31

Suggested Citation

Miranda-Pinto, Jorge and Murphy, Daniel and Walsh, Kieran James and Young, Eric R., Saving Constraints, Inequality, and the Credit Market Response to Fiscal Stimulus (November 22, 2022). Available at SSRN: https://ssrn.com/abstract=3352890 or http://dx.doi.org/10.2139/ssrn.3352890

Jorge Miranda-Pinto

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Daniel Murphy (Contact Author)

University of Virginia - Darden School of Business ( email )

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

Kieran James Walsh

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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