Premium
Private debt overhang and the government spending multiplier: Evidence for the United States
Author(s) -
Bernardini Marco,
Peersman Gert
Publication year - 2018
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2618
Subject(s) - debt overhang , deleveraging , economics , internal debt , debt , debt to gdp ratio , external debt , monetary economics , government debt , government spending , crowding out , business cycle , gross domestic product , macroeconomics , market economy , welfare
Summary Using state‐dependent local projections and historical US data, we find that government spending multipliers are considerably larger in periods of private debt overhang. In particular, while multipliers are below or close to one in low private debt states, we find significant crowding‐in of private spending in periods of debt overhang, resulting in multipliers that are much larger than one. In high private debt episodes, more government purchases even reduce the ratio of government debt to gross domestic product. These results are robust for the type of shocks, and when we control for the business cycle, financial crises, deleveraging episodes, government debt overhang, and the zero‐lower‐bound.