The Heterogeneous Effects of Government Spending: It’s All About Taxes

Axelle Ferriere and Gaston Navarro

No 1237, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model?s cross-sectional implications.

Keywords: Fiscal stimulus; Government spending; Transfers; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: D30 E62 H23 H31 N42 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2018-08-22
New Economics Papers: this item is included in nep-dge, nep-his, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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https://www.federalreserve.gov/econres/ifdp/files/ifdp1237.pdf (application/pdf)

Related works:
Working Paper: The Heterogeneous Effects of Government Spending: It’s All About Taxes (2024)
Working Paper: The Heterogeneous Effects of Government Spending: It’s All About Taxes (2024)
Working Paper: The Heterogeneous Effects of Government Spending: It's All About Taxes (2016)
Working Paper: The Heterogeneous Effects of Government Spending: It's All About Taxes (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1237

DOI: 10.17016/IFDP.2018.1237

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