Household Debt and the Effects of Fiscal Policy
Abstract
This paper examines how the effects of government spending shocks depend on the balance-sheet position of households. Employing U.S. household survey data, the authors find that in response to a positive government spending shock, households with mortgage debt have a large, positive consumption response, while renters have a smaller rise in consumption. Homeowners without mortgage debt, in contrast, have an insignificant expenditure response. A dynamic stochastic general equilibrium (DSGE) model is considered with three types of households: savers who own their housing, borrowers with mortgage debt, and rule-of-thumb consumers who rent housing, and show that it can successfully account for these findings. The model suggests that liquidity constraints and wealth effects, tied to the persistence of public spending, play a crucial role in the propagation of government spending shocks. These findings provide both empirical and theoretical support for the notion that household mortgage debt position plays an important role in the transmission mechanism of fiscal policy.
Description
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Citation
Zubairy, Sarah; Alpanda, Sami; Song, Hyunji (2021). Household Debt and the Effects of Fiscal Policy. Private Enterprise Research Center, Texas A&M University; Texas A&M University. Library. Available electronically from https : / /hdl .handle .net /1969 .1 /199385.