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Effectiveness of Government Intervention under Income Inequality

Author

Listed:
  • Michal Hlavacek

    (Charles University, Prague, Czech Republic)

  • Ilgar Ismayilov

    (Charles University, Prague, Czech Republic)

Abstract

This study examines how economic inequality influences the effectiveness of fiscal policy using a three-agent New Keynesian DSGE model with incomplete financial markets. The findings suggest that economies with a high share of liquidity-constrained households exhibit larger fiscal multipliers due to their higher marginal propensity to consume. Households respond differently to fiscal stimulus due to variations in their propensity to consume and ability to smooth consumption. Additionally, house prices exhibit a temporary decline in response to fiscal stimulus within the modeled framework. Sensitivity analyses show that factors such as loan-to-value ratios, household composition, and housing preferences significantly alter the fiscal multiplier, emphasizing the need to consider inequality in macroeconomic policy design.

Suggested Citation

  • Michal Hlavacek & Ilgar Ismayilov, 2025. "Effectiveness of Government Intervention under Income Inequality," Working Papers IES 2025/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2025.
    • Handle: RePEc:fau:wpaper:wp2025_18
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    File URL: https://ies.fsv.cuni.cz/en/effectiveness-government-intervention-under-income-inequality
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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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