Type: Working Paper
Fiscal multipliers in the 21st Century
Working Paper, EUI RSCAS, 2014/119, Pierre Werner Chair Programme on Monetary Union
BRINCA, Pedro, HOLTER, Hans A., KRUSELL, Per, MALAFRY, Laurence, Fiscal multipliers in the 21st Century, EUI RSCAS, 2014/119, Pierre Werner Chair Programme on Monetary Union - https://hdl.handle.net/1814/33771
Retrieved from Cadmus, EUI Research Repository
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. 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.
Cadmus permanent link: https://hdl.handle.net/1814/33771
Series/Number: EUI RSCAS; 2014/119; Pierre Werner Chair Programme on Monetary Union