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Heterogeneous Consumers and Fiscal Policy Shocks

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  • Emily Anderson
  • Atsushi Inoue
  • Barbara Rossi

    (ICREA, Duke, UPF, CREI)

Abstract

This paper studies stylized empirical facts regarding the effects of unexpected changes in aggregate macroeconomic policies on consumers that are allowed to differ depending on their individual characteristics. In particular, we focus on fiscal shocks due to their important effects on consumers' welfare. We use data from the Consumption Expenditure Survey (CEX) to estimate impulse responses as well as multipliers for government spending and tax policy shocks. The main empirical finding of this paper is that unexpected fiscal shocks have substantially different effects on consumers depending on their age, income levels, and education. In particular, the wealthiest individuals tend to behave according to the predictions of standard RBC models, whereas the poorest individuals tend to behave according to standard IS-LM (non-Ricardian) models, due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality, whereas tax policy shocks most negatively affect the lives of the poor, more so than the rich, thus increasing consumption inequality.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 261.

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Date of creation: 2012
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Handle: RePEc:red:sed012:261

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  1. Heathcote, Jonathan, 2001. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Papers 01-03, Duke University, Department of Economics.
  2. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  3. Mertens, Karel & Ravn, Morten O., 2009. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks," CEPR Discussion Papers 7505, C.E.P.R. Discussion Papers.
  4. Schmitt-Grohé, Stephanie & Uribe, Martín, 2009. "What’s News in Business Cycles," CEPR Discussion Papers 7201, C.E.P.R. Discussion Papers.
  5. Slesnick, Daniel T, 1992. "Aggregate Consumption and Saving in the Postwar United States," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 585-97, November.
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  7. Orazio Attanasio, 1993. "A cohort analysis of saving behaviour by US households," IFS Working Papers W93/04, Institute for Fiscal Studies.
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  9. Orazio P. Attanasio, 1998. "Cohort Analysis of Saving Behavior by U.S. Households," Journal of Human Resources, University of Wisconsin Press, vol. 33(3), pages 575-609.
  10. Lusardi, Annamaria, 1996. "Permanent Income, Current Income, and Consumption: Evidence from Two Panel Data Sets," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 81-90, January.
  11. Michael T. Owyang & Sarah Zubairy, 2009. "Who benefits from increased government spending? a state-level analysis," Working Papers 2009-006, Federal Reserve Bank of St. Louis.
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  13. Karel Mertens & Morten Overgaard Ravn, 2010. "Online Appendix to "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks"," Technical Appendices 09-221, Review of Economic Dynamics.
  14. Morten Ravn & Karel Mertens, 2012. "The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States," 2012 Meeting Papers 638, Society for Economic Dynamics.
  15. Zubairy, Sarah, 2010. "Explaining the Effects of Government Spending Shocks," MPRA Paper 26051, University Library of Munich, Germany.
  16. Barbara Rossi & Sarah Zubairy, 2011. "What is the Importance of Monetary and Fiscal Shocks in Explaining US Macroeconomic Fluctuations?," Working Papers 11-02, Duke University, Department of Economics.
  17. Kristie M. Engemann & Michael T. Owyang & Sarah Zubairy, 2008. "A primer on the empirical identification of government spending shocks," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 117-132.
  18. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
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Cited by:
  1. carroll, daniel, 2014. "Why Do Economists Still Disagree over Government Spending Multipliers?," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.

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