Liquidity constraints and fiscal multipliers

MPRA Paper from University Library of Munich, Germany

Abstract: Although recent studies identified the percentage of constrained agents as the crucial force driving many fiscal policy mechanisms, the values attained were purely the result of model calibrations. We make use of household-level data to estimate the fraction of hand-to-mouth households for several European countries. We calibrate an overlapping generations model with heterogeneous agents to match the net liquid wealth distribution and study the impact of credit constraints on the effectiveness of fiscal consolidation policies. Our findings suggest that the share of hand-to-mouth agents is no longer quantitatively relevant to explain the cross-country heterogeneity in fiscal multipliers when we calibrate the model to match empirically plausible estimates of that share. These results may be driven by the characteristics of the model we employ, which excludes the wealthy hand-to-mouth.

Keywords: Fiscal Multipliers; Liquidity Constraints; Fiscal Consolidation; Hand-to-Mouth (search for similar items in EconPapers)
JEL-codes: D31 E21 E62 H31 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:112132

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