Austerity and private debt

Mathias Klein

No 642, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This study provides empirical evidence that the costs of austerity crucially depend on the level of private indebtedness. In particular, fiscal consolidations lead to severe contractions when implemented in high private debt states. Contrary, fiscal consolidations have no significant effect on economic activity when private debt is low. These results are robust for alternative definitions of private debt overhang, the composition of fiscal consolidations and controlling for the state of the business cycle and government debt overhang. I show that deterioration in household balance sheets is important to understand private debt-dependent effects of austerity.

Keywords: fiscal consolidation; private debt; local projection (search for similar items in EconPapers)
JEL-codes: C23 E32 E62 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:642

DOI: 10.4419/86788747

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