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Asset Liquidity and Fiscal Consolidation Programs

Author

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  • Tiago Bernardino

    (Nova School of Business and Economics)

Abstract

’We argue that the relationship between wealth inequality and fiscal multipliers depends crucially on the type of fiscal experiment used, and on the measure of wealth distribution. We calibrate an overlapping generations model with incomplete markets for different European economies and use Household Finance and Consumption Survey (HFCS) data to compare fiscal multipliers when models are calibrated to match the distribution of gross vs.net wealth. We find a negative relationship between fiscal multipliers and wealth inequalitywhen considering fiscal consolidation programs, in contrast to fiscal expansion experiments which are standard in the literature. The underlying mechanism relies on the relationship between the distribution of wealth and the share of credit -constrained agents. We examine the role of household balance sheet compositions regarding asset liquidity and find that when calibrating the model to match liquid wealth, the relationship between wealth inequality and fiscal multipliers is much stronger.’

Suggested Citation

  • Tiago Bernardino, 2020. "Asset Liquidity and Fiscal Consolidation Programs," Notas Económicas, Faculty of Economics, University of Coimbra, issue 51, pages 69-89, December.
    • Handle: RePEc:gmf:journl:y:2020:i:51:p:69:89
    DOI: 10.14195/2183-203X_51_4
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    File URL: https://impactum-journals.uc.pt/notaseconomicas/article/view/9215/6932
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    Cited by:

    1. Sá, Diogo, 2022. "Liquidity constraints and fiscal multipliers," MPRA Paper 112132, University Library of Munich, Germany.

    More about this item

    Keywords

    Fiscal consolidation; wealth inequality; fiscal multipliers.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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