The Heterogeneous Effects of Government Spending: It’S All About Taxes

65 Pages Posted: 27 Aug 2018 Last revised: 29 Apr 2020

See all articles by Axelle Ferriere

Axelle Ferriere

European University Institute

Gaston Navarro

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-08-22

Abstract

This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model’s cross-sectional implications.

Keywords: Fiscal stimulus, Government spending, Transfers, Heterogeneous agents

JEL Classification: D30, E62, H23, H31, N42

Suggested Citation

Ferriere, Axelle and Navarro, Gaston, The Heterogeneous Effects of Government Spending: It’S All About Taxes (2018-08-22). FRB International Finance Discussion Paper No. 1237, Available at SSRN: https://ssrn.com/abstract=3238588 or http://dx.doi.org/10.17016/IFDP.2018.1237

Axelle Ferriere (Contact Author)

European University Institute ( email )

Via delle Fontanelle 18
Villa La Fonte
Fiesole, 50014
Italy

Gaston Navarro

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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