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When is the government transfer multiplier large ?

Eric Giambattista and Steven Michael Pennings

No 8184, Policy Research Working Paper Series from The World Bank

Abstract: Transfers to individuals were a larger part of the 2009 U.S. stimulus package than government purchases. Using a two-agent New Keynesian model, this paper shows analytically that the multiplier on targeted transfers to financially constrained households is (i) larger than the purchase multiplier if the zero lower bound (ZLB) binds, and (ii) is more sensitive to the degree of monetary accommodation of inflation. Targeted transfers provide the same boost to demand as purchases, but lower aggregate supply relative to purchases, as those receiving transfers want to work less. When the aggregate demand curve inverts, such as when the zero lower bound binds, the extra inflation from lower supply boosts the multiplier. This result also holds quantitatively in a medium-scale version of the model.

Keywords: Public Finance Decentralization and Poverty Reduction; Macro-Fiscal Policy; Public Sector Economics; Economic Adjustment and Lending (search for similar items in EconPapers)
Date: 2017-09-06
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