The Heterogeneous Responses of Consumption between Poor and Rich to Government Spending Shocks

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Abstract

Government spending shocks have substantially different effects on consumers across the income distribution: consumption increases for the poor whereas it decreases for the rich in response to a rise in government expenditure. I shed light on this issue by incorporating a progressive tax scheme and productive public expenditure into a heterogeneous agent model economy with indivisible labor. The model economy is able to successfully match aggregate and disaggregate effects of government spending shocks on consumption. When the government increases its spending and accompanies it by a rise in tax progressivity, the poor are employed and increase their consumption since after-tax wage rates increase while the rich decrease their consumption because of a fall in after-tax wage rates.

Original languageEnglish
Pages (from-to)1999-2028
Number of pages30
JournalJournal of Money, Credit and Banking
Volume51
Issue number7
DOIs
Publication statusPublished - 2019 Oct 1

Bibliographical note

Publisher Copyright:
© 2018 The Ohio State University

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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