Effectiveness of Government Intervention under Income Inequality

Michal Hlavacek and Ilgar Ismayilov
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Michal Hlavacek: Charles University, Prague, Czech Republic
Ilgar Ismayilov: Charles University, Prague, Czech Republic

No 2025/18, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This study examines how economic inequality influences the effectiveness of fiscal policy using a three-agent New Keynesian DSGE model with incomplete financial markets. The findings suggest that economies with a high share of liquidity-constrained households exhibit larger fiscal multipliers due to their higher marginal propensity to consume. Households respond differently to fiscal stimulus due to variations in their propensity to consume and ability to smooth consumption. Additionally, house prices exhibit a temporary decline in response to fiscal stimulus within the modeled framework. Sensitivity analyses show that factors such as loan-to-value ratios, household composition, and housing preferences significantly alter the fiscal multiplier, emphasizing the need to consider inequality in macroeconomic policy design.

Keywords: Fiscal Policy; Economic Inequality; DSGE Models; Fiscal Multiplier; Heterogeneous Agents (search for similar items in EconPapers)
JEL-codes: C68 D31 E21 E62 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2025-18, Revised 2025
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:fau:wpaper:wp2025_18

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