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Fiscal Multipliers in the 21st Century

Per Krusell, Laurence Malafry, Hans Holter and Pedro Brinca ()
Additional contact information
Per Krusell: Stockholm University
Laurence Malafry: Stockholm University

No 303, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: The recent experience of a Great Recession has brought the effectiveness of fiscal policy back into focus. Fiscal multipliers do, however, vary greatly over time and place. Running VARs for a large number of countries, we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of OECD economies, including the distribution of wages and wealth, social security, taxes and debt and study the effects of changing policies and various forms of inequality on the fiscal multiplier. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also negatively related to the average wealth level in the economy. This explains the correlation between wealth inequality and fiscal multipliers.

New Economics Papers: this item is included in nep-dge and nep-pbe
Date: 2015
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Related works:
Journal Article: Fiscal multipliers in the 21st century (2016) Downloads
Working Paper: Fiscal Multipliers in the 21st century (2015) Downloads
Working Paper: Fiscal Multipliers in the 21st Century (2014) Downloads
Working Paper: Fiscal Multipliers in the 21st Century (2014) Downloads
Working Paper: Fiscal Multipliers in the 21st Century (2014) Downloads
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More papers in 2015 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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