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

Christophe Cahn, Patrick Fève and Julien Matheron
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Christophe Cahn: Banque de France
Patrick Fève: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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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 transition dynamics reveals positive average welfare effects overall, although high-wealth and, separately, low-productivity households experience welfare losses. The results are robust across alternative calibrations and model specifications.

Keywords: Heterogeneous agent model; Income & wealth distributions; Fiscal Rebalancing; Fiscal policy (search for similar items in EconPapers)
Date: 2026-04
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Published in European Economic Review, 2026, 184, pp.105243. ⟨10.1016/j.euroecorev.2025.105243⟩

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Related works:
Journal Article: The long-run effects of Fiscal Rebalancing in a heterogeneous-agent model (2026)
Working Paper: The Long-Run Effects of Fiscal Rebalancing in a Heterogeneous-Agent Model (2025)
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:hal:journl:hal-05549529

DOI: 10.1016/j.euroecorev.2025.105243

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