Welfare Eﬀects of Fiscal Procyclicality: Public Insurance with Heterogeneous Agents
No 146, 2018 Meeting Papers from Society for Economic Dynamics
This paper pursues a welfare analysis of ﬁscal policy, speciﬁcally public spending, in an economy with heterogenous agents and incomplete markets. The main quantitative exercise consists in measuring the gains of switching from the (procyclical) spending path of the typical developing country to an acyclical or countercyclical path. The model emphasizes the role of transfer payments from the government to households in alleviating the costs of idiosyncratic shocks. Since these correlate with aggregate shocks, the way ﬁscal policy is conducted along the business cycle has important welfare eﬀects. I ﬁnd that the costs of procyclicality are relatively large and very heterogeneous. While wealth-rich agents don’t suﬀer from procyclicality, poor agents, being either unemployed or unskilled, lose the most. In terms of life-time consumption equivalents these agents may lose as much as 2% from ﬁscal procyclicality, considering only the fraction of spending that is allocated as transfer payments
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:146
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More papers in 2018 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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