Household Leverage and Fiscal Multipliers

Andrés, Javier; Mares, José Emilio Boscá; Ferri, Javier

doi:10.2139/ssrn.2020226

“…The model predicts an increase in real wages following the expansion in government spending that is consistent with the empirical evidence (Galí, Vallés, and López-Salido, 2007;Caldara and Kamps, 2008;Pappa, 2009;and Andrés, Boscá and Ferri, 2015). According to our model, the wage increase becomes stronger as the share of constrained consumersin particular, impatient non-homeowners, HNH and EK types -increases.…”

supporting

confidence: 88%

“…Andrés, Boscá and Ferri (2015) argue that the response of the intensive and extensive margins of labor to fiscal shocks is key to explaining the size of the output multiplier in the presence of financial heterogeneity. We assume that there is perfect risk sharing among household members and that all workers are equally productive and delegate the negotiation of wages and hours with firms to a union.…”

Section: The Modelmentioning

confidence: 99%

Household's Balance Sheets and the Effect of Fiscal Policy

Andrés¹,

Boscá²,

Ferri³

et al. 2018

FEDS

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Using the Panel Survey of Income Dynamics, we identify six household types as a function of their balance sheet composition. 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 DSGE model with search and matching frictions, we explore how changes in the distribution of households 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 the fiscal multipliers, and the distributional consequences of fiscal 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. For calibrations based on the empirical household weights after the Great Recession, our model delivers jobless fiscal expansions. JEL Classification: E21, E62

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“…We consider a standard New Keynesian model with balance sheet heterogeneity in the household sector and search and matching frictions. Andrés, Boscá and Ferri (2015) argue that the response of the intensive and extensive margins of labor to fiscal shocks is key to explaining the size of the output multiplier in the presence of financial heterogeneity. We assume that there is perfect risk sharing among household members and that all workers are equally productive and delegate the negotiation of wages and hours with firms to a union.…”

Section: The Modelmentioning

confidence: 99%

Households' Balance Sheets and the Effect of Fiscal Policy

Andrés

¹

,

Mares

²

,

Ferri

³

et al. 2018

SSRN Journal

Self Cite

37

0

View full text Add to dashboard Cite

Using the Panel Survey of Income Dynamics, we identify six household types as a function of their balance sheet composition. 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 DSGE model with search and matching frictions, we explore how changes in the distribution of households 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 the fiscal multipliers, and the distributional consequences of fiscal 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. For calibrations based on the empirical household weights after the Great Recession, our model delivers jobless fiscal expansions. JEL Classification: E21, E62

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“…A recent example is Andrés, Boscá, and Ferri () who augment the fixed housing setup of Iacoviello () with search and matching frictions to study the size of fiscal multipliers in response to government spending shocks.…”

mentioning

confidence: 99%

“…See figures , , and in Andrés, Boscá, and Ferri (). Since Andrés, Boscá, and Ferri () focus on studying fiscal multipliers, they do not examine whether the house price response to a positive government spending shock is consistent with empirical evidence as we do.…”

mentioning

confidence: 99%

House Prices and Government Spending Shocks

Khan¹,

Reza²

2017

J of Money Credit Banking

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We show that dynamic stochastic general equilibrium (DSGE) models with housing and collateralized borrowing predict a fall in house prices following positive government spending shocks. By contrast, we show that house prices in the United States rise persistently after identified positive government spending shocks. We clarify that the incorrect house price response is due to a general property of DSGE models—approximately constant shadow value of housing—and that modifying preferences and production structure cannot help in obtaining the correct house price response. Properly accounting for the empirical evidence on government spending shocks and house prices using a DSGE model therefore remains a significant challenge.

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Household Leverage and Fiscal Multipliers

Cited by 51 publications

References 95 publications

Household's Balance Sheets and the Effect of Fiscal Policy

Household's Balance Sheets and the Effect of Fiscal Policy

Households' Balance Sheets and the Effect of Fiscal Policy

House Prices and Government Spending Shocks

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