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Federal Reserve Bank of Cleveland
Economic Commentary
Does Fiscal Stimulus Work when Recessions Are Caused by Too Much Private Debt?
Yuliya Demyanyk
Elena Loutskina
Daniel P. Murphy
Abstract

We argue that fiscal stimulus funded by public debt is effective for increasing economic activity and employment even in recessions that are caused by overborrowing in the private sector. We analyze the impact of government spending on local economies between 2007 and 2009 and find evidence that the fiscal multiplier is higher in geographical areas characterized by higher individual household debt. The higher multiplier in those areas might be attributed to a direct increase in both household consumption and local economic slack.


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Yuliya Demyanyk & Elena Loutskina & Daniel P. Murphy, "Does Fiscal Stimulus Work when Recessions Are Caused by Too Much Private Debt?" , Federal Reserve Bank of Cleveland, Economic Commentary, issue August, 2016.
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Keywords: Deficit spending; recessions; economic activity
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