DP9631 Heterogeneous Consumers and Fiscal Policy Shocks

Author(s): Emily Anderson, Atsushi Inoue, Barbara Rossi
Publication Date: September 2013
Keyword(s): Fiscal policy, Government spending shocks, Heterogeneity, Tax shocks
JEL(s): D1, E21, E4, E52, H31, I3
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9631

This paper studies stylized empirical facts regarding the effects of unexpected changes in aggregate macroeconomic fiscal policies on consumers that are allowed to differ depending on their individual characteristics. We use data from the Consumption Expenditure Survey (CEX) to estimate individual-level impulse responses as well as multipliers for government spending and tax policy shocks. The main empirical finding of this paper is that unexpected fiscal shocks have substantially different effects on consumers depending on their age, income levels, and education. In particular, the wealthiest individuals tend to behave according to the predictions of standard RBC models, whereas the poorest individuals tend to behave according to standard IS-LM (non-Ricardian) models, due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality, whereas tax policy shocks most negatively affect the lives of the poor, more so than the rich, thus increasing consumption inequality.