Does household debt affect the size of the fiscal multiplier? We investigate the effects of household debt on government spending multipliers using a smooth transition vector autoregression model. Through generalized impulse response functions, we measure whether the effect of government spending on GDP is conditioned by different levels of household debt in Australia, Sweden, and Norway, three countries with high levels of household indebtedness, and in the world’s seven largest economies. Our results indicate that the short-term effects of government spending tend to be higher if fiscal expansion takes place during periods of low household debt. On average, the fiscal multiplier (on impact) is 0.70, 0.61, and 0.79 (percent of GDP) larger when the increase in government spending takes place during periods of low household debt for Australia, Norway, and the United States.

We estimate a smooth-transition vector autoregression model (ST-VAR) using panel data from 14 OECD countries to study the cross-country spillover effects of economic policy uncertainty (EPU) shocks. An unexpected elevation of EPU originating abroad has an overall contractionary real effect, and the spillover effects depend on the state of the business cycle of the recipient country. EPU spillover shocks during recessions have stronger but less persistent effects on a number of economic indicators. We also find that the interconnectedness of EPU, financial markets, and business confidence are important channels for the EPU shocks to propagate across countries, while the trade channel has limited effects, especially during expansions.