Fiscal Multipliers in the 21st Century

Pedro Brinca, Hans Holter, Per Krusell and Laurence Malafry

2014 Papers from Job Market Papers

Abstract: The recent experience of a Great Recession has brought the effectiveness of fiscal policy back into focus. Fiscal multipliers do, however, vary greatly over time and place. Running VARs for a large number of countries, we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of OECD economies, including the distribution of wages and wealth, social security, taxes and debt and study the effects of changing policies and various forms of inequality on the fiscal multiplier. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also negatively related to the average wealth level in the economy. This explains the correlation between wealth inequality and fiscal multipliers.

JEL-codes: E21 E62 H50 (search for similar items in EconPapers)
Date: 2014-12-23
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Fiscal multipliers in the 21st century (2016)
Working Paper: Fiscal Multipliers in the 21st Century (2015)
Working Paper: Fiscal Multipliers in the 21st century (2015)
Working Paper: Fiscal Multipliers in the 21st Century (2015)
Working Paper: Fiscal Multipliers in the 21st Century (2014)
Working Paper: Fiscal Multipliers in the 21st Century (2014)
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