Session outline

60 minutes Zoom presentation

30 minutes of Q&A

During the Q&A time, participants can raise their hand and pose live questions.

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Abstract

We document that the interest rate response to fiscal stimulus (IRRF) is lower in
countries with high inequality or high household debt. To interpret this evidence we
develop a model in which households take on debt to maintain a consumption threshold
(saving constraint). Now debt-burdened, these households use additional income to
deleverage. In economies with more debt-burdened households, increases in government
spending tighten credit conditions less (relax credit conditions more), leading to smaller
increases (larger declines) in the interest rate. Our theoretical framework predicts that
the negative relationship between the IRRF and debt only holds when credit is not
restricted. It also predicts that the consumption response to fiscal stimulus is falling
in debt and inequality (only during periods of relaxed credit). We perform a series of
empirical tests and find support for these predictions. In doing so, we provide context to
recent evidence on the debt-dependent effects of government spending by highlighting
that the relationship between debt and fiscal effects varies with credit conditions.

Authors

Jorge Miranda-Pinto, University of Queensland.
Daniel Murphy, University of Virginia Darden School of Business.
Kieran James Walsh, UC Santa Barbara.
Eric R. Young, University of Virginia and Zhejiang University.

About School Seminar Series

School of Economics seminars are the main academic seminar series held on a Friday. These seminars are presented by guest researchers and enable School of Economics academics to network with other academics from around Australia and internationally.

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