A Czech National Bank working paper by Michal Škára and Ladislava Issever Grochová finds that fiscal redistribution can reduce the macroeconomic costs of household leverage. Household debt supports economic activity in the short term but depresses gross domestic product over the medium term, with redistribution providing a countercyclical cushion for indebted households. Using panel local projections covering 36 countries from 1980 to 2023, the research finds that the adverse GDP effect is more pronounced in countries with lower income inequality. In those countries, overall redistribution moderates the impact most strongly when debt service burdens peak, a pattern the authors link to structural differences in household indebtedness and low income households’ participation in credit markets.
Czech National Bank research finds fiscal redistribution can cushion the GDP drag from household debt
Czech National Bank research finds that fiscal redistribution can moderate the medium term GDP drag from household debt. The effect is strongest in countries with lower income inequality, particularly when household debt service burdens peak.