Working Paper: CEPR ID: DP8846
Authors: Francesco Giavazzi; Michael McMahon
Abstract: This paper provides new evidence on the effects of fiscal policy by studying, using household-level data, how households respond to shifts in government spending. Our identification strategy allows us to control for time-specific aggregate effects, such as the stance of monetary policy or the US-wide business cycle. However, it potentially prevents us from estimating the wealth effects associated with a shift in spending. We find significant heterogeneity in households' response to a spending shock; the effects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional effects that are lost when estimating an aggregate multiplier. Heads of households working relatively few (weekly) hours, for instance, suffer from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall.
Keywords: fiscal policy; household consumption; labor supply; PSID
JEL Codes: D12; E21; E24; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shifts in government spending (E62) | household consumption (D10) |
| shifts in government spending (E62) | labor supply (J20) |
| shifts in government spending (E62) | real wages (J31) |
| lower-income households and those with heads working fewer hours (H31) | decrease consumption (E21) |
| lower-income households and those with heads working fewer hours (H31) | increase hours worked (J22) |
| higher-income households and those where the head works full-time (R20) | increase consumption (E21) |
| states with low unemployment (J68) | insignificant effects on consumption (D19) |
| states with high unemployment (J64) | positive response in consumption (D12) |
| aggregate fiscal multipliers (E10) | mask important distributional effects (D39) |