Redistributive fiscal policy and marginal propensities to consume

Mariano Spector

Journal of Economic Theory, 2024, vol. 218, issue C

Abstract: This paper studies the output effect of transfers in a New Keynesian model with heterogeneous dynasties of overlapping generations, which allows for arbitrary heterogeneity in marginal propensities to consume (MPCs). The role of MPCs is mainly to determine the timing of the fiscal stimulus. Thus, it is not MPCs per se that determine the cumulative effect on output, but rather the interaction between the timing of the stimulus and other features of the model, such as financial frictions and an endogenous monetary policy response. Financially-constrained households always prefer a front-loaded stimulus, while the endogenous monetary policy can generate an ambiguous relation between MPCs and output. From a normative perspective, however, there is no ambiguity: with larger differences in MPCs, macro stabilization can be obtained at a smaller welfare cost.

Keywords: Heterogeneous agents; New Keynesian effects; Fiscal multipliers; Aggregate demand (search for similar items in EconPapers)
JEL-codes: E12 E21 E40 E50 E62 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:218:y:2024:i:c:s0022053124000498

DOI: 10.1016/j.jet.2024.105843

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