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.