Liquidity constraints and fiscal multipliers

By Diogo Sá

Although recent studies identified the percentage of constrained agents as the crucial force driving many fiscal policy mechanisms, the values attained were purely the result of model calibrations. We make use of household-level data to estimate the fraction of hand-to-mouth households for several European countries. We calibrate an overlapping generations model with heterogeneous agents to match the net liquid wealth distribution and study the impact of credit constraints on the effectiveness of fiscal consolidation policies. Our findings suggest that the share of hand-to-mouth agents is no longer quantitatively relevant to explain the cross-country heterogeneity in fiscal multipliers when we calibrate the model to match empirically plausible estimates of that share. These results may be driven by the characteristics of the model we employ, which excludes the wealthy hand-to-mouth.

I am intrigued by this result that the proportion of hand-to-mouth households does not matter, at least within the empirically relevant range (20-37%). Indeed, the recent literature has been insisting so much on this feature of household data.

One Response to Liquidity constraints and fiscal multipliers

  1. João Quelhas says:

    Dear Christian,

    Thank you for sharing this paper. Indeed, it brings amazing results and provides interesting perspectives on the topic of wealth distribution and fiscal policies. It is curious to see the difference between hand-to-mouth shares between European countries and to find that this is not significant for the difference between fiscal multipliers. Further research must be followed in order to understand these results.

    Great work Diogo Sá!

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