Private Debt Overhang and the Government Spending Multiplier: Evidence for the United States

Using state-dependent local projection methods and historical U.S. data, we find that government spending multipliers are considerably larger in periods of private debt overhang. In particular, we find significant crowding-out of personal consumption and investment in low private debt states, resulting in multipliers that are below one. Conversely, in periods of private debt overhang, there is a strong crowding-in effect, while multipliers are much larger than one. These results are robust for the type of government spending shocks, and when we control for the business cycle, financial crises, deleveraging periods, government debt overhang and the presence of the zero lower bound on the nominal interest rate. Our findings imply that spending multipliers were likely much larger than average during the Great Recession. JEL classification: C32, E32, E62, N12