Fiscal Policy in a Networked Economy
Advanced economies feature complicated networks that connect households, ﬁrms, and regions. How do these structures aﬀect the impact of ﬁscal policy and its optimal targeting? We study these questions in a model with input-output linkages, regional structure, and household heterogeneity in MPCs, consumption baskets, and shock exposures. Theoretically, we derive estimable formulae for the eﬀects of ﬁscal policies on aggregate GDP, or ﬁscal multipliers, and show how network structures determine their size. Empirically, we ﬁnd that multipliers vary substantially across policies, so targeting is important. Beneath these aggregate eﬀects are large spatial and sectoral spillovers from policies directed to any one ﬁrm or household. However, virtually all variation in multipliers stems from diﬀerences in policies’ direct incidence onto households’ MPCs. Thus, while the distributional eﬀects of ﬁscal policy depend on the detailed structure of the economy, maximally expansionary ﬁscal policy simply targets households’ MPCs.
An earlier version of this paper was entitled “Shock Propagation and the Fiscal Multiplier: the Role of Heterogeneity.” We are grateful to Daron Acemoglu, George-Marios Angeletos, Martin Beraja, Ricardo Caballero, Arnaud Costinot, Dave Donaldson, Ben Golub, Isaac Liu, Jeremy Majerowitz, Andrea Manera, Laura Murphy, Elias Papaioannou, Otis Reid, Matthew Rognlie, Karthik Sastry, Lawrence Schmidt, Alp Simsek, Ludwig Straub, Robert Townsend, Ivan Werning, and seminar participants at Harvard, the 2021 NBER Summer Institute Impulse and Propagation Mechanisms Meeting, Stony Brook, Georgetown, the Brookings Institute, the Central Bank of Chile, Oxford, the University of Southern California, the Junior Virtual Macro Conference, the 2021 European Winter Meeting of the Econometric Society, MIT Macro Lunch, and MIT Trade Tea for helpful comments. We also thank RIMS staﬀ members at the Bureau of Economic Analysis for a helpful discussion. First posted version: April 18, 2020. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.