Fiscal Policy with Heterogeneous Agents and Incomplete Markets

Jonathan Heathcote

No 01-03, Working Papers from Duke University, Department of Economics

Abstract: I undertake a quantitative investigation into the short run effects of changes in the timing of taxes for model economies in which heterogeneous households face a borrowing constraint. A combination of the distortionary effects of non-lump-sum taxation and the liquidity effects arising from the asset market structure are found to imply large real effects from tax changes. For example, a temporary proportional income tax increase in the benchmark model economy reduces aggregate consumption by around 29 cents for every additional dollar of tax revenue raised. The consumption of low wealth households who are close to the borrowing constraint is most sensitive to the current tax rate. While there are many such households, richer households account for a disproportionately large fraction of aggregate income and consumption. Thus the distortionary effects of proportional taxation are quantitatively more important at the aggregate level than the effects associated with incompleteness of asset markets.

JEL-codes: E62 H24 H31 H63 (search for similar items in EconPapers)
Date: 2001
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pke
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Fiscal Policy with Heterogeneous Agents and Incomplete Markets (2005)
Working Paper: Fiscal Policy with Heterogeneous Agents and Incomplete Markets (2003)
Working Paper: Fiscal Policy with Heterogeneous Agents and Incomplete Markets (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:01-03

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