Fiscal Policy in a Networked Economy

Fiscal stimulus policies propagate through complex and overlapping economic networks. We study their efficacy and targeting in the presence of input-output linkages, regional trade, and household heterogeneity in employment relationships, marginal propensities to consume (MPCs), and consumption baskets. Theoretically, we derive estimable formulae for fiscal multipliers and characterize how network structures determine their size. Empirically, we estimate that multipliers vary substantially across policies, so targeting is important. However, virtually all variation in multipliers stems from differences in policies’ direct incidence onto households’ MPCs. Thus, while policies’ distributional effects depend on network structures, maximally expansionary fiscal policy simply targets households’ MPCs.