Targeting the Poor: A Macroeconomic Analysis of Cash Transfer Programs

Abstract

This paper introduces cash transfers targeting the poor in an incomplete marketsmodel with heterogeneous agents facing idiosyncratic risk. These transfers change thedegree of insurance in the economy and a ect precautionary motives asymmetrically,leading the poorest households to decrease savings proportionally more than theirricher counterparts. In a model economy calibrated to Brazil, once the cash transferprogram is adopted, wealth inequality and social welfare increase, poverty decreases,while employment and income inequality remain about the same. Imperfect access to nancial markets is important for these results, whereas whether the program is fundedwith lump sum or distortive taxes is not.