The Heterogeneous Effects of Government Spending: It's All About Taxes

Empirical work suggests that while government spending induces an increase in output, it does not signi ficantly decrease private consumption. Contrary to these fi ndings, most representative-household models in macroeconomics predict a crowding-out of private consumption by government spending. To address this issue, we develop a model with heterogeneous households and uninsurable idiosyncratic risk as in Aiyagari (1994). In a model with heterogeneous households, progressivity of taxes is a key determinant of the eff ects of government spending. A rise in government spending can be expansionary, both for output and consumption, if financed with more progressive labor taxes. However, it is contractionary if financed with less progressive taxes. With a narrative approach, we use large changes in military spending to provide evidence that government spending in the United States has been expansionary only in periods of increasing progressivity

Comments on “Capital income taxation with housing”

International audienc

Replication package for: The Heterogeneous Effects of Government Spending: It's All about Taxes

<p>The package contains all material needed to replicate results in Ferriere and Navarro (forthcoming): "The Heterogeneous Effects of Government Spending: It's All about Taxes", Review of Economic Studies.  It also includes a README file with instructions.</p&gt

Fiscal Austerity in Ambiguous Times

International audienceThis paper analyzes optimal fiscal policy with ambiguity aversion and endogenous government spending. We show that, without ambiguity, optimal surplus-to-output ratios are acyclical and that there is no rationale for either reduction or further accumulation of public debt. In contrast, ambiguity about the cycle can generate optimally policies that resemble "austerity" measures. Optimal policy prescribes higher taxes in adverse times and front-loaded fiscal consolidations that lead to a balanced primary budget in the long-run. This is the case when interest rates are sufficiently responsive to cyclical shocks, that is, when the intertemporal elasticity of substitution is sufficiently low

Risk and ambiguity in models of business cycles

We inject aggregate uncertainty - risk and ambiguity - into an otherwise standard business cycle model and describe its consequences. We find that increases in uncertainty generally reduce consumption, but they do not account, in this model, for either the magnitude or the persistence of the most recent recession. We speculate about extensions that might do better along one or both dimensions

Risk and ambiguity in models of business cycles

Abstract We inject uncertainty -risk and ambiguity -into an otherwise standard business cycle model and describe the consequences for business cycles. We find that increases in uncertainty in this model do not account, in this model, for either the magnitude or the persistence of the most recent recession. We speculate about extensions that might do better along one or both dimensions. JEL Classification Codes: E32, D81, G12

Pareto weights as wedges in two-country models

In models with recursive preferences, endogenous variation in Pareto weights would be interpreted as wedges from the perspective of a frictionless model with additive preferences. We describe the behavior of the relative Pareto weight in a two-country world and explore its interaction with consumption and the real exchange rate

On the Optimal Design of Transfers and Income Tax Progressivity

We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we show that adding a transfer to a log-linear tax induces welfare gains almost as large as in the second-best allocation. Transfers allow for more progressive average than marginal tax and transfer rates, achieving redistribution while preserving efficiency. In a rich dynamic model, we quantify the optimal fiscal plan. We use new flexible functions featuring targeted transfers and progressive income taxes, delivering a good empirical fit across the income distribution. Transfers should be larger than currently in the United States and financed with moderate income tax progressivity

Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers

We study the optimal joint design of targeted transfers and progressive income taxes. We develop a simple analytical model and demonstrate an optimally negative relation between transfers and income-tax progressivity, due to both efficiency and redistribution concerns. That is, higher transfers should be financed with lower income-tax progressivity. We next quantify the optimal fiscal plan in a rich dynamic model calibrated to the U.S. economy. Transfers should be generous and financed with moderate income-tax progressivity. To redistribute while preserving efficiency, average tax-and-transfer rates should be more progressive than marginal rates. Transfers, even if lump-sum, precisely allow to disentangle average from marginal rates. Targeted transfers further implement non-monotonic marginal rates, but generate only modest additional gains relative to a lump-sum transfer. Quantitatively, the left tail of the income distribution determines the optimal size of the transfer, while the right tail drives the optimal income-tax progressivity