February 2018

Household's Balance Sheets and the Effect of Fiscal Policy

Javier Andrés, José E. Boscá, Javier Ferri, and Cristina Fuentes-Albero

Abstract:

Using the Panel Survey of Income Dynamics, we identify six household types as a function of their balance sheet composition. Since 1999, there has been a decline in the share of patient households and an increase in the share of impatient households with negative wealth. Using a DSGE model with search and matching frictions, we explore how changes in the distribution of households affect the transmission of government spending shocks. We show that the relative share of households in the left tail of the wealth distribution plays a key role in the aggregate marginal propensity to consume, the magnitude of the fiscal multipliers, and the distributional consequences of fiscal shocks. While the output and consumption multipliers are positively correlated with the share of households with negative wealth, the size of the employment multiplier is negatively correlated. For calibrations based on the empirical household weights after the Great Recession, our model delivers jobless fiscal expansions.

Accessible materials (.zip)

Keywords: Fiscal policy, Panel Survey of Income Dynamics, heterogeneity, household balance sheet, search and matching

DOI: https://doi.org/10.17016/FEDS.2018.012

PDF: Full Paper

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Last Update: January 09, 2020