Search Results
Working Paper
The Nonlinear Effects of Fiscal Policy
We argue that the fiscal multiplier of government purchases is nonlinear in the spending shock, in contrast to what is assumed in most of the literature. In particular, the multiplier of a fiscal consolidation is decreasing in the size of the consolidation. We empirically document this fact using aggregate fiscal consolidation data across 15 OECD countries. We show that a neoclassical life-cycle, incomplete markets model calibrated to match key features of the U.S. economy can explain this empirical finding. The mechanism hinges on the relationship between fiscal shocks, their form of ...
Working Paper
The Nonlinear Effects of Fiscal Policy
We argue that the fiscal multiplier of government purchases is increasing in the spending shock, in contrast to what is assumed in most of the literature. The fiscal multiplier is largest for large positive government spending shocks and smallest for large contractions in government spending. We empirically document this fact using aggregate U.S. data. We find that a neoclassical, life-cycle, incomplete markets model calibrated to match key features of the US economy can explain this empirical finding. The mechanism hinges on the relationship between fiscal shocks, their form of financing, ...
Journal Article
Fiscal Multiplier
Jargon Alert on the Fiscal Multiplier
Working Paper
The Multiplier Effect of Education Expenditure
This paper examines the short-run effects of federal education expenditures on local income. We exploit city-level variation in exposure to national changes in the $30-billion Federal Pell Grant Program, which is the largest program to help low-income students attend college in the U.S., to calculate fiscal multipliers of education expenditures. An increase in Pell grants by 1 percent of a city's income raises local income by 2.4 percent over the next two years. This multiplier effect is larger than estimates for military spending (1.5 on average). Multipliers are higher when grants are ...
Working Paper
Fiscal Stimulus Under Average Inflation Targeting
The stimulus effects of expansionary fiscal policy under average inflation targeting (AIT) depends on both monetary and fiscal policy regimes. AIT features an inflation makeup under the monetary regime, but not under the fiscal regime. In normal times, AIT amplifies the short-run fiscal multipliers under both regimes while mitigating the cumulative multipliers. due to intertemporal substitution. In a zero-lower bound (ZLB) period, AIT reduces fiscal multipliers under a monetary regime by shortening the duration of the ZLB through expected inflation makeup. Under the fiscal regime, AIT has a ...
Working Paper
State-Dependent Local Projections: Understanding Impulse Response Heterogeneity
An impulse response is the dynamic average effect of an intervention across horizons. We use the well-known Kitagawa-Blinder-Oaxaca decomposition to explore a response’s heterogeneity over time and over states of the economy. This can be implemented with a simple extension to the usual local projection specification that nevertheless keeps the model linear in parameters. Using our new decomposition-based approach, we show how to unpack heterogeneity in the fiscal multiplier, an object that at any point in time may depend on a number of potentially correlated factors, including existing ...
Discussion Paper
Understanding Heterogeneous Agent New Keynesian Models: Insights from a PRANK
In recent years there has been a lot of interest in the effect of income inequality (heterogeneity) on the economy, from both academics and policymakers. Researchers have developed Heterogeneous Agent New Keynesian (HANK) models that incorporate heterogeneity and uninsurable idiosyncratic risk into the New Keynesian models that have become a cornerstone of monetary policy analysis. This research has argued that heterogeneity and idiosyncratic risk change many features of New Keynesian models – the transmission of conventional monetary policy, the forward guidance puzzle, fiscal multipliers, ...
Working Paper
The Nonlinear Effects of Fiscal Policy
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 ...
Working Paper
The Nonlinear Effects of Fiscal Policy
We argue that the fiscal multiplier of government purchases in incomplete markets models is nonlinear in the spending shock, in contrast to the multiplier in complete markets models and what is assumed in most of the literature. In particular, the multiplier is increasing in the spending shock, with large positive shocks having the largest multiplier and large negative shocks having the smallest multiplier. The mechanism hinges on the relationship between fiscal shocks, their form of financing, and the response of labor supply across the wealth distribution. The model predicts that the ...
Working Paper
The Nonlinear Effects of Fiscal Policy
We argue that the fiscal multiplier of government purchases is nonlinear in the size of the spending shock. In particular, the multiplier is increasing in the spending shock, with more expansionary government spending shocks generating larger multipliers and more contractionary shocks generating smaller multipliers. We document that empirically this holds true across time, countries and types of shocks. We then 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. A ...