Targeted Transfers and the Fiscal Response to the Great Recession

Abstract

Between 2007 and 2009, government expenditures increased rapidly across the OECD countries. While economic research on the impact of government purchases has flourished, in the data, about three quarters of the increase in expenditures in the United States (and more in other countries) was in government transfers. We document this fact, and show that the increase in U.S. spending on retirement, disability, and medical care has been as high as the increase in government purchases. We argue that future research should focus on the positive impact of transfers. Towards this, we present a model in which there is no representative agent and Ricardian equivalence does not hold because of uncertainty, imperfect credit markets, and nominal rigidities. Targeted lump-sum transfers are expansionary both because of a neoclassical wealth effect and because of a Keynesian aggregate demand effect.

Income Instability and the Response of the Safety Net

“…The 2009 ARRA fiscal policy stimulus (CBO 2012) provided tax cuts and increased spending on income support programs, including benefit increases to the EITC as well as expanded unemployment insurance and SNAP coverage (CBO 2012;Elsby, Hobijn, and Sahin 2010;Hardy, Smeeding, and Ziliak 2016;Monea and Sawhill 2009;Oh and Reis 2012;Ziliak 2011). Proponents of expansionary fiscal policies tout at least two benefits, one of which is enhanced liquidity among disadvantaged families with higher propensities to consume (Fisher, Johnson, and Smeeding 2015).…”

On Fiscal Multipliers: Estimates From a Medium Scale Dsge Model

“…Recent work byOh and Reis (2011) suggests that, for that reason, a representative agent model might not be suitable to study the effects of transfers on the economy and consider a model where Ricardian equivalence does not hold to look at the impact of targeted transfers.24 For instance the government spending multiplier is computed as follows:Y t+k / G t = (% Y t+k /% G t )(Y/G),where Y and G are the steady-state values of output and government spending, respectively.25 The estimated impact multipliers are shown in the online appendix.…”

Fiscal and Monetary Policies after the Crises

“…Transfers can enhance the liquidity of constrained households, and this raises overall aggregate demand. This is the approach taken by Oh and Reis (2012), who argue that transfers operate through two distinct channels. The first, which they label a 'neoclassical' channel, is due to the fact that higher transfers imply a redistribution away from more productive workers.…”

“…Expansionary fiscal policy thus consists of classic 'public works' style projects, directly responsible for generating employment. Yet, as Oh and Reis (2012) have argued, the large wave of fiscal stimulus packages that were rolled out across OECD countries between 2007 and 2009 were dominated by increases in targeted transfers -these comprised 64 per cent of the increase in expenditure in the median case. A large body of empirical work has documented evidence that suggests fiscal multipliers and marginal propensities to consume out of such transfers are large, but the theoretical literature is only gradually providing ways to model this process satisfactorily.…”