Consumption patterns of indebted households: unravelling the relevance of fiscal policy

Abstract We have investigated the influence of fiscal instruments, notably taxes and government spending, on household consumption in two different samples and two measures of household debt to provide a comprehensive analysis of the topic. We used dynamic panel models and the Generalised Method of Moments (GMM) approach for 24 and 32 advanced and emerging countries from 1995 to 2020. Our findings show that fiscal impulses increase private consumption. However, when households are highly indebted, the effects are different, and the increase in public spending or the reduced taxes discourages household consumption compared to the baseline (lower debt) group. These results suggest a precautionary effect.