Saving Constraints, Inequality, and the Credit Market Response to Fiscal Stimulus
54 Pages Posted: 6 Apr 2019 Last revised: 7 Dec 2022
There are 2 versions of this paper
Saving Constraints, Inequality, and the Credit Market Response to Fiscal Stimulus
Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus
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: Suggested Citation