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Heterogeneous Household Finances and the Effect of Fiscal Policy

Javier Andrés (), José Boscá (), Javier Ferri () and Cristina Fuentes-Albero ()

No 2017-05, Working Papers from FEDEA

Abstract: This paper develops a model with heterogeneous households in terms of net worth and collaterizable assets. Using sample weights estimated from the PSID, we show that balancesheet heterogeneity is key to characterizing the aggregate effects of government spending along different dimensions. We find that: (i) the response of individual consumption to a government spending shock is negatively correlated with household’s net worth and also depends on her access to mortgage and non-mortgage credit, which implies that the size of the fiscal multiplier is sensitive to the distribution of household types; (ii) the response of aggregate employment is negatively correlated with the share of impatient households; as the weight of these households in total population increases firms rely more on adjustments in the intensive margin to meet the fiscal induced boost in aggregate demand, thus generating jobless recoveries; (iii) the output multiplier is positively correlated with wealth inequality; and (iv) while a government spending shock has a welfare cost for wealthy households, it delivers a welfare gain for constrained households.

Date: 2017-03
New Economics Papers: this item is included in nep-dge
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