Debt Overhang, Deleveraging, and Government Spending Multipliers

Abstract 

In this paper I investigate whether government spending multipliers vary across household debt cycles. Using US historical data and instrumenting government purchases with two standard measures of spending shocks I find that only when households face stricter borrowing constraints (debt overhang) and then deleverage, increases in government purchases are significantly more expansionary. The main effects are channeled through private consumption in the first year, and then by investment. The results are robust with respect to the sample period and to several alternative potential states.