Transfers, Excess Savings, and Large Fiscal Multipliers

Gene Kindberg-Hanlon

No 2024/208, IMF Working Papers from International Monetary Fund

Abstract: This paper seeks to show that a New Keynesian model can produce highly persistent and large output responses to fiscal transfers and excess wealth, in line with recent empirical literature. The introduction of myopia to households to allow realistic degrees of dissaving from wealth and accumulated transfers, alongside more standard Keynesian features, achieves this goal. Model IRFs closely match the high fiscal multipliers from the tax stimulus SVAR literature, and also have important inflationary consequences. An application of this model to the COVID era, where transfer payments in the United States supported an accumulation of ``excess savings", results in inflation rising by over 1 percentage point for several years as well as a persistent increase in output over the same horizon. Finally, under the same framework and calibration, it is found that high debt and a weak fiscal rule can dull the transmission of monetary policy due to the wealth effect from higher interest payments.

Keywords: Fiscal multipliers; excess savings; COVID-19; inflation; IMF working paper research Department; wealth effect; excess saving; interest receipts; wealth channel; transfer stimulus; fiscal-monetary policy interaction; EIP payment disbursement; Phillips curve; rule result; consumption function; Fiscal transfers; Income; Consumption; Fiscal rules; Income shocks; Global (search for similar items in EconPapers)
Pages: 43
Date: 2024-09-27
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