Working Paper: CEPR ID: DP8239
Authors: Hyunseung Oh; Ricardo Reis
Abstract: Between 2007 and 2009, government expenditures increased rapidly across the OECD countries. While economic research on the impact of government purchases has flourished, in the data, about three quarters of the increase in expenditures in the United States (and more in other countries) was in government transfers. We document this fact, and show that the increase in U.S. spending on retirement, disability, and medical care has been as high as the increase in government purchases. We argue that future research should focus on the positive impact of transfers. Towards this, we present a model in which there is no representative agent and Ricardian equivalence does not hold because of uncertainty, imperfect credit markets, and nominal rigidities. Targeted lump-sum transfers are expansionary both because of a neoclassical wealth effect and because of a Keynesian aggregate demand effect.
Keywords: Fiscal policy; Incomplete markets; Nominal rigidities
JEL Codes: E62; H31; H50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Targeted transfers (F16) | Employment (J68) |
| Targeted transfers (F16) | Output (Y10) |
| Targeted transfers (F16) | Aggregate demand (E00) |
| Employment (J68) | Output (Y10) |
| Lower-income households (R20) | Higher marginal propensity to consume (D11) |
| Higher marginal propensity to consume (D11) | Aggregate demand (E00) |
| Targeted transfers (F16) | Private consumption (D19) |
| Targeted transfers (F16) | Investment (G31) |