Public debt expansions and the dynamics of the household borrowing constraint

António A. Antunes, Valerio Ercolani

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Contrary to a well-established view, public debt expansions may tighten the household borrowing constraint over time. Within an incomplete-markets model featuring an endogenous borrowing limit, we show that plausible debt-financed fiscal policies generate such tightening through an increase in the interest rate. The tightening makes constrained agents deleverage and reinforces the precautionary saving motive of the unconstrained. This appetite for assets impacts factor prices which, in some cases, amplify the households' reactions to the policies. For example, the tightening can substantially magnify the government spending multiplier through strengthening the typical negative wealth effect on labor supply induced by the fiscal stimulus. Moreover, the tightening affects the political support to the policies mainly through price effects.

Original languageEnglish
Pages (from-to)1-32
JournalReview of Economic Dynamics
Volume37
DOIs
Publication statusPublished - Jul 2020

Keywords

  • Endogenous borrowing constraint
  • Fiscal policies and multipliers
  • Government debt
  • Heterogeneous households
  • Incomplete markets

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