Working Papers

In this paper, I build a dynamic general equilibrium model calibrated to the U.S. economy to study the macroeconomic effects of alternative fiscal consolidation strategies in a context where the private sector is heavily indebted. Fiscal consolidation is defined as a permanent reduction of the public debt-to-GDP ratio through government spending cuts or tax hikes. I show that in the long run, fiscal consolidation entails output benefits that are dampened when private debt is high. This effect occurs independently of the fiscal instrument used to stabilize the debt. In the short run, I find that a fiscal policy that raises labour or capital tax rates induces deleveraging in the private sector, which amplifies temporary output losses due to fiscal consolidation policies. By contrast, a fiscal consolidation achieved by government spending cuts or consumption tax hikes facilitates the repayment of private debt, thereby mitigating the negative output effect associated with a public debt reduction. Finally, regarding social welfare, I find that a fiscal consolidation brings higher welfare gains when government spending or consumption tax rates adjust in an environment of high private debt. However, it increases the social welfare loss when capital or labour tax rates adjust to meet the public debt target. 

Work in Progress

In this paper, I study how the size of fiscal multipliers depends on private debt levels in a dynamic stochastic general equilibrium model that features a rich fiscal policy block and incorporates household and non-financial corporate debt. By calibrating the model to the US economy, I find that the output multiplier at impact for government spending and consumption tax rate is smaller when both household and corporate debt is high. However, the output multiplier is higher for labor income and capital income tax rates with high private debt. I also examine the welfare effects of the different fiscal strategies. With high private debt levels, welfare losses are higher when considering government spending or a consumption tax rate shock. However, the welfare gains associated with a capital tax rate shock are higher with higher household and corporate debt. Finally, in the case of the labor tax rate, the aggregate welfare is lower in the context of high private debt.