Search Results
Showing results 1 to 6 of approximately 6.
(refine search)
Journal Article
Does Fiscal Stimulus Work when Recessions Are Caused by Too Much Private Debt?
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.
Working Paper
Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus
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 ...
Working Paper
Fiscal Stimulus and Consumer Debt
In the aftermath of 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 2006-2009 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 ...
Working Paper
Why are goods and services more expensive in rich countries? demand complementarities and cross-country price differences
Empirical studies show that tradable consumption goods are more expensive in rich countries. This paper proposes a simple yet novel explanation for this apparent failure of the law of one price: Consumers? utility from tradable goods depends on their consumption of complementary goods and services. Monopolistically competitive firms charge higher prices in countries with more complementary goods and services because consumer demand is less elastic there. The paper embeds this explanation within a static Krugman (1980)-style model of international trade featuring differentiated tradable goods. ...
Working Paper
How does government spending stimulate consumption?
Recent empirical work finds that government spending shocks cause aggregate consumption to increase over the business cycle, contrary to the predictions of Neoclassical and New Keynesian models. This paper proposes a mechanism to account for the consumption increase that builds on the framework of imperfect information in Lucas (1972) and Lorenzoni (2009). In my model, owners of firms targeted by an increase in government spending perceive an increase in their permanent income relative to their future tax liabilities. Owners of firms not targeted remain unaware of the implicit increase in ...
Working Paper
A shopkeeper economy
This paper investigates the properties of an economy populated by shopkeepers who monopolistically provide differentiated services at zero marginal cost but positive fixed costs. In this setting, equilibrium output and wealth depend on consumer demand rather than available supply. The ?shopkeeper economy? is compared to a standard production-based economy in which wealth is a function only of labor supply and technology. I demonstrate that the existence of producers who face only fixed costs provides a counterexample to the notion that ?supply creates its own demand.?