Overall, our results suggest that fiscal stimulus is effective even during recessions induced by consumer-debt overhang. An increase in government spending is associated with a fiscal multiplier above one, and the multiplier is higher in consumer-debt-ridden geographical areas. The higher multiplier in those areas might be attributed to a direct increase in household consumption and local economic slack. Our results imply that the ills of private debt can be cured by government spending that is financed by public debt. At least in the short term (two years are considered in this study), public debt is effective in stimulating income and employment even in areas of high consumer indebtedness.FRB Cleveland
Does Fiscal Stimulus Work?
Yulyia Demyanyk, Elena Loutskina, Daniel Murphy
ht Mark Thoma at Economist's View