Inequality, fiscal policy and COVID19 restrictions in a demand-determined economy

Alan Auerbach, Yuriy Gorodnichenko and Daniel Murphy

European Economic Review, 2021, vol. 137, issue C

Abstract: We evaluate the effects of inequality, fiscal policy, and COVID19 restrictions in a model of economic slack with potentially rigid capital operating costs. Rich households satiate their demand for goods/services (and consume an endowment on the margin), whereas poor households’ spending on goods/services is limited by their income (which in turn depends on spending by the rich and on fiscal transfers). The model implies that inequality has large negative effects on output, while also diminishing the effects of demand-side fiscal stimulus. COVID restrictions can reduce current-period GDP by more than is directly associated with the restrictions themselves when rigid capital costs induce firm exit. Higher inequality is associated with larger restriction multipliers. The effectiveness of fiscal policies depends on inequality and the joint distribution of capital operating costs and firm revenues. Furthermore, COVID19 restrictions can cause future inflation, as households tilt their expenditure toward the future.

Keywords: COVID19; Fiscal policy; Firm exit; Spending multipliers; Inequality (search for similar items in EconPapers)
JEL-codes: E32 E62 H3 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Inequality, fiscal policy and COVID19 restrictions in a demand-determined economy (2021)
Working Paper: Inequality, Fiscal Policy and COVID19 Restrictions in a Demand-Determined Economy (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:137:y:2021:i:c:s0014292121001550

DOI: 10.1016/j.euroecorev.2021.103810

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