Are Transfer Payments Stimulative?—Sometimes

ABSTRACT This paper investigates the stimulative effects of transfer payments on macroeconomic aggregates using impulse response functions, forecast error variance decompositions, and spending multipliers in state‐dependent time series econometric models. It is shown that under symmetric response assumptions, positive transfer payment impulses lead to positive effects on gross domestic product, personal income and personal consumption. However, when an asymmetry linked to economic conditions is used, it is found that transfer payment effects are asymmetric and have significant positive effects on macroeconomic variables during economic recessions but are not very stimulative during economic expansions. A deeper analysis shows that the stimulus effects during economic recessions results primarily from the recent special programs undertaken during the Great Recession and the COVID‐19 recession. These results indicate that policy which uses transfer payments as economic stimulus for the economy during expansionary economic conditions will not see much benefit. Furthermore, transfer payment policy expansions during recessionary economic conditions do not offer much stimulus except when the programs are unusually large as seen during the Great Recession and the COVID recession. Results for forecast error variance decompositions and spending multipliers reinforce these findings. Transfer payment programs are often motivated by both the benefits to recipients, and the stimulative benefit to the economy. These results show that, outside of the periods where extraordinary transfer payment expansions occur, the economic stimulus effects of transfer payment programs are small and that transfer payments should only be motivated by the benefits to the recipients.