The Fiscal Multiplier

Taking off into the Wind: Unemployment Risk and State-Dependent Government Spending Multipliers

“…This value lies well within the range of empirical estimates reported in the literature (see Ramey (2019) for a recent overview). The spending multiplier delivered by our model is significantly larger than the counterfactually low multipliers typically obtained in models with search and matching frictions but with perfect insurance (e.g., Monacelli, Perotti, and Trigari (2010)), or in models with incomplete insurance markets but with a frictionless labor market (e.g., Hagedorn, Manovskii, and Mitman (2019)). Monacelli, Perotti, and Trigari (2010) show that it is possible to increase the size of the multiplier in a standard model with search and matching by assuming large average steady-state values of non-work to work activities -the equivalent of the replacement rate, h, in our model.…”

“…Second, the composition effect can be directly mapped into the relative fraction of unemployed households, which is readily observable in the data. Finally, allowing employment to adjust both along the intensive and extensive margins enables us to generate spending multipliers that are more in line with existing empirical estimates than the multipliers obtained by Hagedorn, Manovskii, and Mitman (2019). A version of our economy in which hours worked are constrained to remain constant underestimates the average output multiplier by more than 60%.…”

“…Recent studies based on models with heterogeneous agents and sticky prices -which have come to be known as HANK models -have shown that the distributional effects of first-and secondmoment shocks can alter significantly their transmission mechanisms and thus their aggregate implications. 6 In a related paper to ours, Hagedorn, Manovskii, and Mitman (2019) extend this class of models by allowing for wage rigidity to evaluate the size of the fiscal multiplier. Our model, however, differs from Hagedorn et al's in that the source of household heterogeneity in our paper is not an (exogenous) idiosyncratic level of productivity but the employment status of households.…”

Regional Consumption Responses and the Aggregate Fiscal Multiplier

“…Oh and Reis (2012) and McKay and Reis (2016) study the effects of government intervention on the U.S. business cycle. Hagedorn, Manovskii, and Mitman (2017), Bhandari, Evans, Golosov, and Sargent (2018), and Auclert, Rognlie, and Straub (2018) study demand shocks and fiscal policy with heterogeneity and incomplete markets.…”

The welfare and distributional effects of fiscal volatility: A quantitative evaluation

“…Finally, our work contributes to the growing body of literature on macroeconomic policy in heterogeneous-agent environments (Auclert, 2017, Bachmann and Bai, 2013a, Bhandari et al, 2016, 2017a,b, Böhm, 2015, Brinca et al, 2016, Dyrda and Pedroni, 2017, Ferriere and Navarro, 2017, Gornemann et al, 2016, Gomes et al, 2013, Hagedorn et al, 2017, Heathcote, 2005, Hedlund et al, 2016, Kaplan and Violante, 2014Kaplan et al, 2016, Li, 2013, McKay and Reis, 2016, and Röhrs and Winter, 2017. There is also a budding empirical literature on the distributional consequences of policy actions: see Coibion et al (2017) for the case of monetary policy and Giorgi and Gambetti (2012) for the case of fiscal policy.…”