The Nonlinear Effects of Fiscal Policy

Pedro Brinca, Miguel Faria-e-Castro, Miguel H. Ferreira and Hans Holter
Authors registered in the RePEc Author Service: Miguel Homem Ferreira and Miguel H. Ferreira (migueltchferreira@gmail.com)

No 2019-015, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We argue that the fiscal multiplier of government purchases is increasing in the size o the spending shock: more expansionary government spending shocks generate larger multipliers and more contractionary shocks generate smaller multipliers. We empirically document this pattern across time, countries, and modes of financing. We propose a neoclassical mechanism that hinges on the relationship between fiscal shocks, their form of financing, and the response of labor supply across the wealth distribution. An incomplete markets model predicts that the aggregate labor supply elasticity is increasing in the spending shock, and this holds regardless of whether shocks are deficit- or balanced-budget financed. We show that this mechanism survives the introduction of nominal price rigidities and find evidence for it using micro-data for the US.

Keywords: fiscal multipliers; nonlinearity; asymmetry; heterogeneous agents (search for similar items in EconPapers)
JEL-codes: E21 E62 H50 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2019-05-22, Revised 2024-12-11
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://s3.amazonaws.com/real.stlouisfed.org/wp/2019/2019-015.pdf Full text (application/pdf)

Related works:
Working Paper: The Nonlinear Effects of Fiscal Policy (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2019-015

Ordering information: This working paper can be ordered from
subscribe@stls.frb.org

DOI: 10.20955/wp.2019.015

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Scott St. Louis (scott.stlouis@stls.frb.org).