Fiscal Multipliers: A Heterogenous-Agent Perspective
We use an analytically tractable heterogeneous-agent (HANK) version of the standard New Keynesian model to show how the size of fiscal multipliers depends on i) the distribution of factor incomes, and ii) the source of nominal rigidities. With sticky prices but flexible wages, the standard representative-agent (RANK) model predicts large multipliers because profits fall after a fiscal stimulus and the resulting negative income effect makes the representative worker work harder. Our HANK model, where workers do not own stock and thus do not receive profit income, predicts smaller fiscal multipliers. In fact, they are smaller with sticky prices than with flexible prices. When wages are the source of nominal rigidity, in contrast, fiscal multipliers are close to one, independently of income heterogeneity and price stickiness.
We thank Valerie Ramey for the key impetus to this paper. We also thank seminar participants and Søren Ravn for useful comments. All errors are our own. Financial support from Handelsbanken’s research foundations is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.