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How Do Income and the Debt Position of Households Propagate Public into Private Spending?

Rüth, Sebastian K. ; Simon, Camilla

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Abstract

We study the household sector’s post-tax income and debt position as propagation mechanisms of public into private spending, in postwar U.S. data. In structural VARs, we obtain the consumption “crowding-in puzzle” for surges in public spending and show this consumption response to be accompanied by a persistent increase in disposable income. Endogenously reacting income, however, is insufficient to rationalize conditional comovement of private and public spending: once we hypothetically force (dis)aggregate measures of income to their pre-shock paths, consumption still rises. Corroborating these findings within an external-instruments-identified VAR, which constitutes an adequate laboratory for the simultaneous interplay of financial and macroeconomic time-series, we provide causal evidence of fiscal stimulus prompting households to take on more credit. This favorable debt cycle is paralleled by dropping interest rates, narrowing credit spreads, and inflating collateral prices, e.g., real estate prices, suggesting that softening borrowing constraints support the accumulation of debt and help rationalizing the absence of crowding-out.

Item Type: Working paper
Series Name: Discussion Paper Series / University of Heidelberg, Department of Economics
Volume: 0676
Place of Publication: Heidelberg
Date Deposited: 26 Feb 2020 14:12
Date: February 2020
Number of Pages: 35
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: government spending shock, household income, household indebtedness, credit spread, external instrument, fiscal foresight
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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