Fiscal Adjustments and Debt-Dependent Multipliers: Evidence from the U.S. Time Series

Abstract:

Using sign restrictions within a time-varying parameter vector autoregressive (TVP-VAR) framework, we provide new time-series evidence of debt-dependent multipliers for the U.S. while simultaneously obtaining larger multipliers during recessions in line with previous studies. The Ricardian channel where households reduce consumption expecting larger fiscal adjustments is shown to be relevant for the debt-dependent multipliers. The TVP-VAR framework also allows us to observe changes in the magnitude of fiscal adjustments. We find that the larger fiscal adjustments in the presence of rising indebtedness is the major driving force behind the smaller multipliers in the post-Volcker period rather than debt accumulation itself.