Tax Structures and Fiscal Multipliers in HANK Models

Othman Bouabdallah, Pascal Jacquinot and Ante Šterc

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We develop a Heterogeneous Agents New Keynesian model with a detailed outline (block) of financial intermediation and plausible marginal propensities to consume (MPC). Accounting for heterogeneous MPCs allows plausible predictions of the effectiveness of fiscal policy in the short and long term. Using our model, calibrated to the U.S. economy, we show that government spending has the largest short- and long-term effect on output when financed by debt, with gradual repayment through lump-sum transfers/taxes. We find a novel, non-linear, and non-monotonic relationship between the effectiveness of the fiscal stimulus, income tax progressivity, and the debt-to-GDP ratio, absent in representative or two-agent models. Lastly, the model suggests limited effectiveness of the fiscal stimulus and higher inflationary pressure for highly indebted economies.

JEL-codes: D31 E21 G11 H31 H63 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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