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Public debt, iMPCs & fiscal policy transmission

Author

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  • Stefano Grancini

Abstract

In this paper, I examine the relationship between public debt and the effectiveness of fiscal policy, presenting evidence of an inverse relationship between government debt and fiscal multipliers. To explain the results, I develop and calibrate a HANK model tailored to the U.S. economy. The model reveals that higher public debt diminishes fiscal multipliers by making households less constrained; with greater debt serving as a liquidity self-insurance tool, agents exhibit a weaker labor response to fiscal shocks. Theoretically, I show that the level of government debt influences fiscal multipliers through its impact on intertemporal marginal propensities to consume (iMPCs). The primary factor driving changes in iMPCs is the heterogeneous response of agents to the fiscal shock across the aggregate wealth distribution. By holding more liquidity, households can better self-insure against potential future shocks, thereby affecting the overall effectiveness of fiscal policy.

Suggested Citation

  • Stefano Grancini, 2024. "Public debt, iMPCs & fiscal policy transmission," Nova SBE Working Paper Series wp664, Universidade Nova de Lisboa, Nova School of Business and Economics.
    • Handle: RePEc:unl:unlfep:wp664
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    More about this item

    Keywords

    Fiscal multipliers; Public debt; HANK; Government spending; iMPCs;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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