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Stefano Grancini
- 3 September 2025
- WORKING PAPER SERIES - No. 3106Details
- Abstract
- This paper investigates 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. Theoretically, I show intertemporal marginal propensities to consume (iMPCs) are sufficient statistics of public debt, influencing fiscal multipliers. Decomposing changes in iMPCs into components driven by wealth distribution and the policy function, I find that the primary factor driving variations in iMPCs is the change in interest rates due to the variation of government bonds. This highlights a novel mechanism: even in the absence of fiscal limits or crowding out, large stocks of debt can weaken fiscal stimulus through their effect on household behavior.
- JEL Code
- E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
D31 : Microeconomics→Distribution→Personal Income, Wealth, and Their Distributions
D52 : Microeconomics→General Equilibrium and Disequilibrium→Incomplete Markets