Fed in Print
All Title Author Abstract Keywords
Bank Series Content Type Author JEL Classification Keyword

Working Paper Revision

The Nonlinear Effects of Fiscal Policy


Abstract: We argue that the fiscal multiplier of government purchases is increasing in the size o the spending shock: more expansionary government spending shocks generate larger multipliers and more contractionary shocks generate smaller multipliers. We empirically document this pattern across time, countries, and modes of financing. We propose a neoclassical mechanism that hinges on the relationship between fiscal shocks, their form of financing, and the response of labor supply across the wealth distribution. An incomplete markets model predicts that the aggregate labor supply elasticity is increasing in the spending shock, and this holds regardless of whether shocks are deficit- or balanced-budget financed. We show that this mechanism survives the introduction of nominal price rigidities and find evidence for it using micro-data for the US.

Keywords: fiscal multipliers; nonlinearity; asymmetry; heterogeneous agents;

JEL Classification: E21; E62; H50;

https://doi.org/10.20955/wp.2019.015

Access Documents

File(s): File format is application/pdf https://s3.amazonaws.com/real.stlouisfed.org/wp/2019/2019-015.pdf
Description: Full text

Authors

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2024-12-11

Number: 2019-015

Related Works