Geiger, Martin; Zachariadis, Marios (2022): Consumers’ updating, policy shocks and public debt: An empirical assessment of state dependencies. Macroeconomic Dynamics, 26(8).
Abstract
We assess the impact of fiscal and monetary policy shocks on US survey-based consumer expectations within states of low and high public debt. Following an unexpected increase in government spending, consumption intentions rise in the low-debt state and fall in the high-debt state. Overall, such a shock has adverse effects on expectations in high-debt states. Similarly, contractionary monetary policy shocks induce pessimistic expectations in the high-debt state but not in the low-debt state. The estimated responses suggest that higher public debt fuels considerations regarding its repayment, giving rise to state dependencies in the updating of expectations in response to both fiscal and monetary policy shocks.
Keywords: Expectations, Rational Inattention, Ricardian, Fiscal Theory of the Price Level
JEL classification: E31, E52, E62, E63
