This paper seeks to show that a New Keynesian model can produce highly persistent and large output responses to fiscal transfers and excess wealth, in line with recent empirical literature. The introduction of myopia to households to allow realistic degrees of dissaving from wealth and accumulated transfers, alongside more standard Keynesian features, achieves this goal. Model IRFs closely match the high fiscal multipliers from the tax stimulus SVAR literature, and also have important inflationary consequences. An application of this model to the COVID era, where transfer payments in the United States supported an accumulation of ``excess savings", results in inflation rising by over 1 percentage point for several years as well as a persistent increase in output over the same horizon. Finally, under the same framework and calibration, it is found that high debt and a weak fiscal rule can dull the transmission of monetary policy due to the wealth effect from higher interest payments.
Authors
- DOI
- https://doi.org/10.5089/9798400289354.001
- ISBN
- 9798400289354
- ISSN
- 1018-5941
- Issue
- 208
- Pages
- 43
- Published in
- United States of America
- Series
- Working Paper No. 2024/208
- Stock No
- WPIEA2024208
- Volume
- 2024
Table of Contents
- Introduction 4
- A New Keynesian Framework 6
- Calibration 9
- Calibrating the rate of dissaving from wealth and fiscal transfer shocks 10
- Calibrating the myopia of wealthy households 11
- Baseline response to a transfer shock 13
- Estimated multipliers and relation to the SVAR literature 14
- The importance of sticky wages, capital, and interest payments in generating large and persistent multipliers 18
- Simulating the effects of the pandemic transfers on output 20
- A final note on monetary policy transmission with myopia and high debt 23
- Conclusion 25
- Model setup 27
- Households 27
- Wage determination 30
- Investment 32
- Government sector 33
- Producing firms 33
- Retailers and final goods firms 34
- Full list of model equations 35
- Distortionary and non-distortionary taxes 37
