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Fiscal Stimulus and Consumer Debt


In the aftermath of the 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 2007–2009 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 whether aggregate demand and aggregate supply economic mechanisms contribute to the debt-dependent multiplier.

JEL codes: E62, E21, E32, E44, H56, H57.


Suggested citation: Demyanyk,Yuliya, Elena Loutskina, and Daniel Murphy, 2017. “Fiscal Stimulus and Consumer Debt,” Federal Reserve Bank of Cleveland, Working Paper no. 16-20R. https://doi.org/10.26509/frbc-wp-201620r.

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