Asset Liquidity and Fiscal Consolidation Programs

Tiago Bernardino ()
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Tiago Bernardino: Nova School of Business and Economics

Notas Económicas, 2020, issue 51, 69-89

Abstract: ’We argue that the relationship between wealth inequality and fiscal multipliers depends crucially on the type of fiscal experiment used, and on the measure of wealth distribution. We calibrate an overlapping generations model with incomplete markets for different European economies and use Household Finance and Consumption Survey (HFCS) data to compare fiscal multipliers when models are calibrated to match the distribution of gross vs.net wealth. We find a negative relationship between fiscal multipliers and wealth inequalitywhen considering fiscal consolidation programs, in contrast to fiscal expansion experiments which are standard in the literature. The underlying mechanism relies on the relationship between the distribution of wealth and the share of credit -constrained agents. We examine the role of household balance sheet compositions regarding asset liquidity and find that when calibrating the model to match liquid wealth, the relationship between wealth inequality and fiscal multipliers is much stronger.’

Keywords: Fiscal consolidation; wealth inequality; fiscal multipliers. (search for similar items in EconPapers)
JEL-codes: E21 E62 H31 H63 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gmf:journl:y:2020:i:51:p:69:89

DOI: 10.14195/2183-203X_51_4

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