Working Paper: CEPR ID: DP8641
Authors: Tommaso Monacelli; Roberto Perotti
Abstract: Does it matter, for the size of the government spending multiplier, which category of agents bears the brunt of the necessary adjustment in taxes? In an economy with heterogeneous agents and imperfect financial markets, the answer depends on whether or not New Keynesian features, such are price rigidity, are present. If prices are flexible, the tax-financing rule is either neutral or leads to a larger multiplier when taxes are levied on the borrowing constrained agents. If prices are sticky, the multiplier is larger when taxes are levied on the unconstrained agents. We discuss the conditions under which these results hold. Furthermore, we study the real effects of fiscal expansions via pure, revenue-neutral, tax redistributions.
Keywords: No keywords provided
JEL Codes: E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Flexible prices (P22) | Output multiplier is neutral (E19) |
| Sticky prices (C54) | Output multiplier is larger when taxes are levied on unconstrained agents (savers) (H31) |
| Tax burden on unconstrained agents (savers) (H31) | Consumption of constrained agents (borrowers) increases (E21) |
| Fiscal expansions via revenue-neutral tax redistributions under flexible prices (H31) | Output is neutral (C67) |
| Fiscal expansions via revenue-neutral tax redistributions under sticky prices (H31) | Significant expansions in output if favoring constrained borrowers (E51) |