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Press Release

Fiscal stimulus is effective for increasing economic activity and employment even in recessions caused by consumer overborrowing, says Cleveland Fed researcher

Excessive household debt contributed to the 2007 financial crisis and slowed the recovery from the Great Recession. Some economists and policymakers contend that fiscal stimulus is not helpful in such a recession. However, a new study from the Federal Reserve Bank of Cleveland suggests that fiscal stimulus is effective even during recessions induced by consumer-debt overhang.

Fiscal stimulus is generally believed to be helpful during recessions, as each dollar of additional government spending increases GDP by more than a dollar. This phenomenon, known as the fiscal multiplier, is attributed to consumers spending the additional income generated by government spending. But if consumers use money from the fiscal stimulus to repay their existing debt rather than to consume additional goods and services, the stimulus might not generate the desired multiplier effect.

Looking at national security spending by the Department of Defense across different cities during the Great Recession, Cleveland Fed researcher Yuliya Demyanyk and her co-authors find that the fiscal multiplier increases with local consumer debt-to-income ratios. That is, in areas where households had higher debt, additional defense spending in the area led to higher local-area GDP growth than in areas with lower debt. “In fact,” says Demyanyk, “the fiscal multiplier almost doubles as we move from cities in the bottom quartile of consumer indebtedness to those in the top quartile.”

Noting that areas with higher consumer debt also tend to suffer higher levels of unemployment, the researchers say the results are likely driven by local economic slack and an increase in household consumption. “Higher government spending allowed national security firms to hire workers who would have been unemployed otherwise, and those workers could earn a paycheck and generate more local-area consumption,” says Demyanyk. “In such an environment, fiscal stimulus is more effective because new government jobs created with the spending aren't filled at the expense of jobs at private companies.”

Read Does Fiscal Stimulus Work when Recessions Are Caused by Too Much Private Debt?

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.455.4479