A working paper version of our project “Fiscal Multipliers in the 21st Century” is now available in the Robert Schuman Working Paper Series 2014/119. In the paper we aim to see to what extent, for observable differences in wealth distributions across countries, we should expect to observe economically meaningful differences in fiscal multipliers.
We setup a benchmark model allowing us to model many differences between the countries in our sample, namely differences in the level and progressiveness of labor income taxation, age profile of wages, wage dispersion, pension systems, debt over GDP and others and, most importantly, differences in wealth distributions.
We find that that an increase in 1 standard deviation of the wealth GINI coefficient is associated with an increase in the response of output to government consumption of almost 20% of the average response in our sample . In line with previous literature, the channels through which these differences matter come mostly through differences in the proportion of liquidity constrained agents and the different marginal products of capital implied by the observed differences in capital to output ratios.
This project is joint with Hans Holter, Per Krusell and Laurence Malafry. It was accepted to the Carnegie-Rochester-NYU Conference Series in Public Policy in April 24th-25th 2015 and, pending successful review by editors and referees, will be forthcoming in the Journal of Monetary Economics, Volume 63:1, January 2016. You can access the working paper version here.