Heterogeneous Consumers, Credit Rationing, and Tax-Benefit Policies

We examine the effects of redistribution policies on consumption. Unlike other studies in the field, our model does not start from risk-averse preferences. Instead, we focus on the interaction between heterogeneous households, characterized by the income shocks they face, and banks that maximize expected profits by controlling credit supply at given loan and deposit rates. All household types (savers, rule-of-thumb consumers, constrained and unconstrained borrowers) normally coexist and respond endogenously to changes in the economic environment. We find that tax-benefit policies—if properly designed—can boost current aggregate consumption, although their marginal effectiveness may diminish quite rapidly.