International Finance Discussion Papers (IFDP)

Twitter Share RSS

August 2018

The Heterogeneous Effects of Government Spending: It's All About Taxes

Axelle Ferriere and Gaston M. Navarro

Abstract:

This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when nanced with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model's cross-sectional implications.
Accessible materials (.zip)

Keywords: Fiscal Stimulus, Government Spending, Transfers, Heterogeneous Agents

DOI: https://doi.org/10.17016/IFDP.2018.1237

PDF: Full Paper

Back to Top
Last Update: January 09, 2020