Working Paper: NBER ID: w27366
Authors: Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
Abstract: We evaluate the effects of inequality, fiscal policy, and COVID19 restrictions in a model of economic slack with potentially rigid capital operating costs. Inequality has large negative effects on output, while also diminishing the effects of demand-side fiscal stimulus. COVID restrictions can reduce current-period GDP by more than is directly associated with the restrictions themselves when rigid capital costs induce firm exit. Higher inequality is associated with larger restriction multipliers. The effectiveness of fiscal policies depends on inequality and the joint distribution of capital operating costs and firm revenues. Furthermore, COVID19 restrictions can cause future inflation, as households tilt their expenditure toward the future.
Keywords: Inequality; Fiscal Policy; COVID-19; Economic Slack
JEL Codes: E32; E62; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inequality (D63) | output (C67) |
| inequality (D63) | spending behavior of poor households (D12) |
| spending behavior of poor households (D12) | output (C67) |
| covid19 restrictions (P33) | GDP (E20) |
| firm exit (G33) | GDP (E20) |
| higher inequality (D31) | effectiveness of fiscal policies (H30) |
| covid19 restrictions (P33) | future inflation (E31) |
| higher inequality (D31) | future inflation (E31) |