Fiscal Stimulus and Consumer Debt

48 Pages Posted: 18 Sep 2016 Last revised: 1 Nov 2017

See all articles by Yuliya Demyanyk

Yuliya Demyanyk

University of Illinois at Chicago

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: August 10, 2016

Abstract

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

Suggested Citation

Demyanyk, Yuliya and Loutskina, Elena and Murphy, Daniel, Fiscal Stimulus and Consumer Debt (August 10, 2016). FRB of Cleveland Working Paper No. 16-20, Available at SSRN: https://ssrn.com/abstract=2840022 or http://dx.doi.org/10.2139/ssrn.2840022

Yuliya Demyanyk (Contact Author)

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

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

University of Virginia - Darden School of Business ( email )

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

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