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Redistributive fiscal policy and marginal propensities to consume

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  • Spector, Mariano

Abstract

This paper studies the output effect of transfers in a New Keynesian model with heterogeneous dynasties of overlapping generations, which allows for arbitrary heterogeneity in marginal propensities to consume (MPCs). The role of MPCs is mainly to determine the timing of the fiscal stimulus. Thus, it is not MPCs per se that determine the cumulative effect on output, but rather the interaction between the timing of the stimulus and other features of the model, such as financial frictions and an endogenous monetary policy response. Financially-constrained households always prefer a front-loaded stimulus, while the endogenous monetary policy can generate an ambiguous relation between MPCs and output. From a normative perspective, however, there is no ambiguity: with larger differences in MPCs, macro stabilization can be obtained at a smaller welfare cost.

Suggested Citation

  • Spector, Mariano, 2024. "Redistributive fiscal policy and marginal propensities to consume," Journal of Economic Theory, Elsevier, vol. 218(C).
    • Handle: RePEc:eee:jetheo:v:218:y:2024:i:c:s0022053124000498
    DOI: 10.1016/j.jet.2024.105843
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    1. Gao, Yawen & Li, Lun & Liang, Xin, 2025. "Measuring MPC heterogeneity in China: Insights from household registration reform," China Economic Review, Elsevier, vol. 94(PC).

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    Keywords

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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