The Heterogeneous Responses of Consumption between Poor and Rich to Government Spending Shocks

Abstract

Government spending shocks have substantially different effects on consumers across the income distribution: consumption increases for the poor whereas it decreases for the rich in response to a rise in government expenditure. I shed light on this issue by incorporating a progressive tax scheme and productive public expenditure into a heterogeneous agent model economy with indivisible labor. The model economy is able to successfully match aggregate and disaggregate effects of government spending shocks on consumption. When the government increases its spending and accompanies it by a rise in tax progressivity, the poor are employed and increase their consumption since after‐tax wage rates increase while the rich decrease their consumption because of a fall in after‐tax wage rates.

Unemployment, Partial Insurance, and the Multiplier Effects of Government Spending

“…The implication is that spending shocks may temporarily reduce the consumption inequality associated with job loss. Related findings on the distributional effects of government spending can be found inGalí et al (2007),Anderson, Inoue, and Rossi (2016), andMa (2019).…”

Unemployment, Partial Insurance, and the Multiplier Effects of Government Spending

“…The implication is that spending shocks may temporarily reduce the consumption inequality associated with job loss. Related findings on the distributional effects of government spending can be found inGalí et al (2007),Anderson, Inoue, andRossi (2016), andMa (2019).…”

Workers, capitalists, and the government: fiscal policy and income (re)distribution

“… 29 Complementing the evidence on the positive labor share response to government spending shocks in Fig. 4 , Ma (2019) documents heterogeneity in the consumption responses of poor and rich households. …”