The Long-Run Effects of Fiscal Rebalancing in a Heterogeneous-Agent Model

Christophe Cahn, Patrick Fève and Julien Matheron

Working papers from Banque de France

Abstract: This paper examines the long-run macroeconomic effects of a Fiscal Rebalancing reform that shifts taxation from payroll to consumption under a balanced-budget constraint. Using a heterogeneous-agent model calibrated to French data, we compare pre- and post-reform steady states. The reform increases both aggregate labor and capital, with a stronger impact on capital in the heterogeneous-agent model than in its representative-agent counterpart. It also heightens wealth inequality, as a disproportionate share of the increase in aggregate wealth accrues to wealthier households. A welfare analysis that accounts for the transition dynamics reveals a positive average welfare effect overall, although high-wealth and, separately, low-productivity households experience welfare losses. The results are robust across alternative calibrations and model specifications.

Keywords: Fiscal Policy; Fiscal Rebalancing; Income and Wealth Distributions; Heterogeneous-Agent Models (search for similar items in EconPapers)
JEL-codes: C54 D31 E62 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2025
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https://www.banque-france.fr/system/files/2025-12/WP1028.pdf

Related works:
Working Paper: The Long-Run Effects of Fiscal Rebalancing in a Heterogeneous-Agent Model (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:1028

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