Open AccessAsset Liquidity and Fiscal Consolidation Programs
Author(s) -
Tiago Bernardino
Publication year - 2020
Publication title -
notas económicas/notas económicas
Language(s) - English
Resource type - Journals
eISSN - 2183-203X
pISSN - 0872-4733
DOI - 10.14195/2183-203x_51_4
Subject(s) - economics , market liquidity , consolidation (business) , inequality , asset (computer security) , consumption (sociology) , distribution (mathematics) , monetary economics , national wealth , fiscal policy , macroeconomics , econometrics , finance , mathematical analysis , social science , mathematics , computer security , computer science , sociology
We argue that the relationship between wealth inequality and fiscal multipliers depends crucially on the type of fiscal experiment used, and on the measure of wealth distribution. We calibrate an overlapping generations model with incomplete markets for different European economies and use Household Finance and Consumption Survey (HFCS) data to compare fiscal multipliers when models are calibrated to match the distribution of gross vs. net wealth. We find a negative relationship between fiscal multipliers and wealth inequality when considering fiscal consolidation programs, in contrast to fiscal expansion experiments which are standard in the literature. The underlying mechanism relies on the relationship between the distribution of wealth and the share of credit‑ constrained agents. We examine the role of household balance sheet compositions regarding asset liquidity and find that when calibrating the model to match liquid wealth, the relationship between wealth inequality and fiscal multipliers is much stronger.