Research Seminar "Can we cure debt with more debt: Is fiscal stimulus effective during consumer debt induced recession?"

Author: Elena Loutskina (Professor of Business, Darden School of Business Administration, University of Virginia)
Topic: "Can we cure debt with more debt: Is fiscal stimulus effective during consumer debt induced recession?"
Date and time: Wednesday, July 13, 16:00 - 18:00
Place: IPM Business School
Working language: English
 
The recent Great Recession in the U.S. illustrates the importance of consumer balance sheets during an economic downturn. A number of academic studies argue that accumulation of debt by consumers set the stage for the crisis (see, e.g., Mian and Sufi, 2011). Debt overhang also slowed the economic recovery (Mian, Rao, and Sufi, 2013; Mian and Sufi, 2015). In such an environment, both fiscal and monetary authorities are facing a challenge of designing a proper policy response since high consumer debt balances are frequently invoked to question the efficacy of expansionary fiscal policy to counteract the economic downturn. “You cannot solve a problem created by (private) debt by running up even more (public) debt, say the critics” (Eggertsson and Krugman, 2012). In this paper, we empirically demonstrate that fiscal policy is effective during periods of high consumer indebtedness. Using transaction-level data on Department of Defense (DOD) spending during the 2007–2009 recessionary period, we document that the government spending multiplier is higher in geographies with higher pre-recession consumer indebtedness.
 
During the seminar we discussed the economic mechanisms that link the consumer debt and overall economic growth. We then evaluated if and how the government spending (fiscal stimulus) can mitigate the recessionary consequences of consumer indebtedness.
 

• Can Debt Be Cured with More Debt? | PDF