Household's Balance Sheets and the Effect of Fiscal Policy
61 Pages Posted: 14 Feb 2018 Last revised: 29 Apr 2020
Date Written: February, 2018
Using households' balance sheet composition in the Panel Survey of Income Dynamics, we identify six household types. Since 1999, there has been a decline in the share of patient households and an increase in the share of impatient households with negative wealth. Using a six-agent New Keynesian model with search and matching frictions, we explore how changes in households' shares affect the transmission of government spending shocks. We show that the relative share of households in the left tail of the wealth distribution plays a key role in the aggregate marginal propensity to consume, the magnitude of fiscal multipliers, and the distributional consequences of government spending shocks. While the output and consumption multipliers are positively correlated with the share of households with negative wealth, the size of the employment multiplier is negatively correlated. Moreover, our calibrated model can deliver jobless fiscal expansions.
Keywords: Panel Study of Income Dynamics, Household balance sheet, Fiscal policy, Six-agent New Keynesian model, Search and matching
JEL Classification: E21, E62
Suggested Citation: Suggested Citation