Fiscal Multipliers in the 21st Century

Pedro Brinka, Hans A. Holter, Per Krussell, Laurence Malafry

Prepared for Carnegie-Rochester Conference Series on Public Policy, April 24th 2015.

Fiscal multipliers appear to vary greatly over time and space. Based on VARs for a large number of countries, we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers. In an attempt to account for this finding, we develop a life-cycle, overlappinggenerations 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 government debt and study how a fiscal multiplier depends on various country characteristics. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also to the average wealth level in the economy. These findings together help us generate a cross-country pattern of multipliers that is quite similar to that in the data.

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Published Sep. 9, 2015 10:32 AM - Last modified Oct. 27, 2017 1:02 PM