How Do Income and the Debt Position of Households Propagate Fiscal Stimulus into Consumption?

Expansions in public spending induce a surge in private consumption that is accompanied by increasing post-tax income of households. Endogenously reacting income, however, is insufficient to rationalize conditional comovement of private and public spending: household expenditures even expand in scenarios in which income does not rise. Corroborating this observation, we show within a SVAR-IV that fiscal stimulus causally prompts households to take on more credit. This favorable debt cycle is paralleled by dropping credit rates/spreads and inflating collateral prices, e.g., real estate prices, suggesting that softening borrowing constraints support the accumulation of debt and help rationalizing the absence of crowding-out