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Fiscal Multipliers in the 21st century

Author

Listed:
  • Pedro brinca

    (Nova School of Business and Economics, Universidade Nova de Lisboa, Portugal; Centro de Economia e Finanças, Universidade do Porto, Portugal; Robert Schuman Centre for Advanced Studies, European University Institute, Italy)

  • Hans A. Holter

    (Department of Economics, University of Oslo, Norway)

  • Per Krusell

    (Institute for International Economic Studies, Stockholm University, Sweden)

  • Laurence Malafry

    (Department of Economics, Stockholm University, Sweden)

Abstract

Fiscal multipliers appear to vary greatly overtime and space. Based on VARs for a large number of countries, we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers. In an attempt to account for this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of OECD economies, including the distribution of wages and wealth, social security, taxes, and government debt and study how a fiscal multiplier depends on various country characteristics. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also to the average wealth level in the economy. These findings together help us generate across-country pattern of multipliers that is quite similar to that in the data.

Suggested Citation

  • Pedro brinca & Hans A. Holter & Per Krusell & Laurence Malafry, 2015. "Fiscal Multipliers in the 21st century," GEE Papers 0059, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Sep 2015.
    • Handle: RePEc:mde:wpaper:0059
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    File URL: https://www.gee.gov.pt/RePEc/WorkingPapers/GEE_PAPERS_59.pdf
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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
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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