Research

I study how public debt shapes fiscal policy transmission. Using U.S. local projections with identified government-spending shocks, I find that output and consumption multipliers are smaller when the household-sector Treasury position is high relative to GDP. To interpret this state dependence, I develop a heterogeneous-agent New Keynesian model in which government bonds provide households with safe assets for saving and self-insurance. Higher household absorption of public debt raises the equilibrium real return, changes the distribution of liquid assets, and lowers intertemporal marginal propensities to consume (iMPCs), weakening the private-consumption amplification of government spending. Two forces drive the result. First, higher real rates alter household consumption-saving rules, with the largest effects concentrated among low-asset households. Second, the additional supply of safe assets reallocates households away from constrained, high-MPC states. A decomposition shows that the real-rate channel accounts for almost all of the change in household spending rules, while distributional reallocation remains quantitatively important. The results imply that fiscal effectiveness depends not only on the amount of public debt, but also on how public debt maps into household liquidity and equilibrium prices.

Understanding how policies can stabilize household welfare during recessions requires a framework that captures household heterogeneity, unemployment risk, and general-equilibrium labor market dynamics. We study a contractionary demand shock in a Heterogeneous-Agent New-Keynesian model with search-and-matching friction on the labor market (HANK–SAM) and compare the effectiveness of alternative income-stabilization policies. Using a common fiscal envelope, we contrast increases in unemployment insurance generosity, with targeted transfers to hand-to-mouth households, and universal transfers. Policy effectiveness is assessed through the aggregate consumers’ welfare, measured in consumption-equivalent variation units. In an economy calibrated to U.S. data, unemployment insurance yields the largest welfare gain per percentage point of fiscal cost, followed by targeted transfers, while universal transfers are the least effective. A temporary increase in unemployment insurance generates the highest welfare, as it combines immediate cash-flow support with insurance effects, disproportionally benefiting households with high marginal propensities to consume.

In this paper we provide evidence that there are statistical and economically meaningful differences in terms of attitudes towards risk at the aggregate level across countries, as captured by country-specific estimations of the coefficient of relative risk aversion. This has important implications for fiscal policy as it leads to large differences in the output response to the same fiscal policy shock. When calibrating the risk aversion at the country level, using country-specific estimates of the coefficient of relative risk aversion, we find multipliers to the same fiscal consolidation shock to differ as much as between 0.35 and 0.55.