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In this paper we look at the interplay between the level of household leverage in the economy and fiscal policy. When the fiscal rule is defined on lump-sum transfers, government spending or consumption taxes, the impact multipliers of transitory fiscal shocks become substantially amplified in an environment of easy access to credit by impatient consumers. However, when the government reacts to debt deviations by raising distortionary taxes on income, labour or capital, the effects of household debt on the size of the impact output multipliers vanish or even reverse. We also find that differences in fiscal multipliers between high and low indebtedness regimes belong basically to the short run, whereas the long-run multipliers are barely affected by the level of household debt in the economy. Finally, we find that fiscal shocks exert an unequal welfare effect on impatient and patient households that can even be of opposite signs.

Instruments, rules, and household debt: the effects of fiscal policy