Local Methods for Large Transfers

Christian Bayer, Luigi-Maria Briglia, Ralph Luetticke, Maximilian Weiß and Yannik Winkelmann

No 21913, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Large fiscal transfers shift households between regions with high and low marginal propensities to consume (MPCs), resulting in nonlinear aggregate responses. We develop a Nonlinear DEGM Update (NDU) method that shifts the wealth distribution nonlinearly over a short time window while solving the aggregate economy using a fast, first-order state-space approximation. A 10 percent transfer of annual GDP increases output by 4.5 percent in the nonlinear and NDU solutions, but by 12.0 percent in the linear solution. The empirical liquid-wealth distribution around zero disciplines this nonlinearity and exhibits a strong asymmetry. A stochastic debt-entry cost closely reproduces this empirical pattern.

JEL-codes: C46 C63 D15 E21 E62 (search for similar items in EconPapers)
Date: 2026-09
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