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When is the government transfer multiplier large?

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  • Giambattista, Eric
  • Pennings, Steven

Abstract

Transfers to individuals were a larger part of the 2009 US stimulus package than government purchases. Using a two-agent New Keynesian model, we show analytically that the multiplier on targeted transfers to financially constrained households is (i) larger than the purchase multiplier if the zero lower bound (ZLB) binds, and (ii) is more sensitive to the degree of monetary accommodation of inflation. Targeted transfers provide the same boost to demand as purchases, but lower aggregate supply relative to purchases, as those receiving transfers want to work less. When the aggregate demand curve inverts — such as when the ZLB binds — the extra inflation from lower supply boosts the multiplier. We show this result also holds quantitatively in a medium-scale version of the model.

Suggested Citation

  • Giambattista, Eric & Pennings, Steven, 2017. "When is the government transfer multiplier large?," European Economic Review, Elsevier, vol. 100(C), pages 525-543.
  • Handle: RePEc:eee:eecrev:v:100:y:2017:i:c:p:525-543
    DOI: 10.1016/j.euroecorev.2017.09.003
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    6. Liu, Shih-fu & Huang, Wei-chi & Lai, Ching-chong, 2022. "The Paradox of Toil at the Zero Lower Bound in a TANK Model," European Economic Review, Elsevier, vol. 148(C).
    7. Girish Bahal & Anand Shrivastava, 2022. "Fiscal transfers and inflation: evidence from India," Empirical Economics, Springer, vol. 63(4), pages 1837-1858, October.
    8. Christian Bayer & Benjamin Born & Ralph Luetticke & Gernot J Müller, 2023. "The Coronavirus Stimulus Package: How Large is the Transfer Multiplier," The Economic Journal, Royal Economic Society, vol. 133(652), pages 1318-1347.
    9. Pennings,Steven Michael, 2020. "Cross-Region Transfers in a Monetary Union : Evidence from the US and Some Implications," Policy Research Working Paper Series 9244, The World Bank.
    10. Jorge Fornero & Juan Guerra-Salas & Camilo Pérez N., 2019. "Multiplicadores fiscales en Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 22(1), pages 058-080, April.
    11. Canale, Rosaria Rita & Liotti, Giorgio & Marani, Ugo, 2019. "Structural public balance adjustment and poverty in Europe," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 227-236.
    12. Jia, Bijie, 2018. "Second Thoughts on Estimating Expansionary Fiscal Policy E ffects in the United States," MPRA Paper 90298, University Library of Munich, Germany.
    13. Benjamín García & Sebastián Guarda & Markus Kirchner & Rodrigo Tranamil, 2019. "XMAS: An extended model for analysis and simulations," Working Papers Central Bank of Chile 833, Central Bank of Chile.
    14. Venera Timiryanova & Dina Krasnoselskaya & Irina Lakman & Denis Popov, 2021. "Inter- and Intra-Regional Disparities in Russia: Factors of Uneven Economic Growth," Sustainability, MDPI, vol. 13(24), pages 1-31, December.
    15. Albonico, Alice & Ascari, Guido & Gobbi, Alessandro, 2021. "The public debt multiplier," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
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    17. Macaulay, Alistair, 2021. "The attention trap: Rational inattention, inequality, and fiscal policy," European Economic Review, Elsevier, vol. 135(C).
    18. Charalampidis, Nikolaos, 2022. "Top income shares, inequality, and business cycles: United States, 1957–2016," European Economic Review, Elsevier, vol. 150(C).
    19. Marie-Pierre HORY & Grégory LEVIEUGE & Daria ONORI, 2018. "The (low) fiscal multiplier when debt is denominated in foreign currency," LEO Working Papers / DR LEO 2583, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    20. Girish Bahal, 2020. "Estimating the Impact of Welfare Programs on Agricultural Output: Evidence from India," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 982-998, May.
    21. Jia, Bijie, 2017. "A Second Thought on Estimating Expansionary Fiscal Policy Effects in the U.S," MPRA Paper 89264, University Library of Munich, Germany, revised Sep 2018.
    22. Rosaria Rita Canale & Giorgio Liotti, 2022. "Absolute Poverty and Sound Public Finance in the Eurozone," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 20(2), pages 327-344, June.
    23. Guo, Fei & Kit-Ming Yan, Isabel & Chen, Tao & Hu, Chun-Tien, 2023. "Fiscal multipliers, monetary efficacy, and hand-to-mouth households," Journal of International Money and Finance, Elsevier, vol. 130(C).
    24. Bilbiie, Florin O., 2020. "The New Keynesian cross," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 90-108.

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    More about this item

    Keywords

    Fiscal transfers; Fiscal policy; Fiscal stimulus; Government spending; Multipliers; New-Keynesian models; Zero lower Bound; Monetary policy;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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