Day 4 Redistributive and macro effects of fiscal stimulus policies Gianluca Violante New York University Mini-Course on Policy in Models with Heterogeneous Agents Bank of Portugal, June 15-19, 2105 p. 1 /1
The wealthy hand-to-mouth (W-HtM)! W-HtM: households with little liquid wealth but substantial illiquid wealth! P-HtM: households with little liquid wealth and little illiquid wealth! N-HtM: households with substantial liquid wealth! Like the P-HtM:! Large MPC out of small transitory income windfalls! Unlike the P-HtM:! 1. Escape standard definitions and empirical measurement! 2. Similar demographic characteristics to the N-HtM! 3. Behave like the N-HtM for large income shocks! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
Outline! 1. Emergence of W-HtM behavior! 2. Strategy for identifying the HtM from household portfolio data! 3. Apply strategy to survey data from 8 countries:! US, Canada, Australia, UK, Germany, France, Italy, Spain! 4. Estimation of MPC out of transitory shocks! 5. Implications for fiscal policy: compare 3 models (paper)!! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
W-HtM households in theory! Why consume income every period, rather than use wealth to smooth shocks?! High-return illiquid assets generate trade-off:! Better consumption smoothing (short-run)! vs! Higher lifetime consumption (long-run)! Smoothing requires either:! 1. Opportunity cost of holding large cash balances! 2. Borrowing at expensive rates! 3. Paying transaction cost to adjust illiquid asset!! Intuition: welfare losses from not smoothing are second order! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
From theory to measurement! Two kinks in household budget constraint:! 1. Zero liquid wealth! 2. Credit limit! HtM households end period at one of these kinks! Mismatch in timing of c and y within a pay-period! Survey data: HtM households may hold some liquid wealth! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
Identifying the HtM in survey data! Households with positive net liquid wealth:!!!! P-HtM at the zero kink:!!! W-HtM at the zero kink:! a it =0, a it > 0, Households with negative liquid wealth:! 0 apple m it apple y it 2 0 apple m it apple y it 2! P-HtM at the credit limit:!!! W-HtM at the credit limit:! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
Identifying the HtM in survey data! Households with positive net liquid wealth:!!!! P-HtM at the zero kink:!!! W-HtM at the zero kink:! a it =0, a it > 0, Households with negative net liquid wealth:! 0 apple m it apple y it 2 0 apple m it apple y it 2! P-HtM at the credit limit:!!! W-HtM at the credit limit:! a it =0, a it > 0, m it apple y it 2 m m it apple y it 2 m Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
Empirical details! Pay-period: Bi-weekly! Income: All labor income before taxes, plus government transfers that are regular inflows of liquid wealth! Liquid wealth: Checking, savings, money market and call accounts plus directly held mutual funds, stocks and corporate bonds, plus imputed cash holdings, net of credit card debt! Illiquid wealth: Value of housing and real estate net of mortgages and HELOC, private retirement accounts, cash value of life insurance, certificates of deposit and saving bonds! Borrowing limit: One month of income! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
How large is the share of HtM in the US?! 0.1.2.3.4.5 W HtM P HtM 1989 1992 1995 1998 2001 2004 2007 2010 30% of US households are HtM, 2/3 of which are W-HtM! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
What are the ages of HtM households?! 0.1.2.3.4 W HtM P HtM 20 40 60 80 Age P-HtM: young households! W-HtM: middle-age households! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
Do W-HtM look more like P-HtM or N-HtM?! Thousands of 2010 USD 0 20 40 60 80 W HtM N HtM P HtM Thousands of 2010 USD 0 100 200 300 W HtM N HtM 20 40 60 80 Age (a) Median income! 20 40 60 80 Age (b) Median illiquid wealth! 0.2.4.6.8 1 W HtM N HtM 0.2.4.6.8 1 W HtM N HtM 20 40 60 80 Age (c) Portfolio share: housing! 20 40 60 80 Age (d) Portfolio share: retirement accounts! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
W-HtM among homeowners, by leverage Share of HtM among Homeowners 0.1.2.3.4.5.6.7 W HtM P HtM =0 0.1.1.2.2.3.3.4.4.5.5.6.6.7.7.8.8.9.9 1 >1 Leverage Ratio Leverage ratio is a strong predictor of HtM status The Wealthy Hand-to-Mouth Kaplan, Violante and Weidner (2014)
Persistence of HtM status 2007 to 2009 P W N P 0.548 0.127 0.326 W 0.101 0.455 0.444 N 0.055 0.129 0.816 Ergodic 0.126 0.191 0.683 Expected durations: P-HtM status: W-HtM status: N-HtM status: 4.5 years 3.5 years 11 years The Wealthy Hand-to-Mouth Kaplan, Violante and Weidner (2014)
Share of HtM households across countries! 0.1.2.3.4.5 W HtM P HtM US CA AU UK DE FR IT ES Substantial cross-country variation in share of HtM! In all countries, twice as many W-HtM as P-HtM! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
Liquid wealth holdings across countries! Fraction of households 0.05.1.15.2 10 5 0 5 10 Net liquid wealth to monthly labor income ratio Fraction of households 0.05.1.15.2 10 5 0 5 10 Net liquid wealth to monthly labor income ratio United States! Spain! Higher liquid wealth in Europe possibly due to lower credit availability! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
MPC out of transitory income shocks! Bi-annual panel data on income, consumption and wealth! Identify transitory shocks using strategy from Blundell et al. (2008)!! MPC out of transitory! income shock! 3 HtM groups! 2 HtM groups! P-HtM! W-HtM! N-HtM! HtM-NW! N-HtM-NW! 0.24! 0.30! 0.13! 0.23! 0.20! (0.06)! (0.05)! (0.04)! (0.05)! (0.03)! Notes: 1999-2011 data from PSID. Bootstrapped standard errors in parentheses.! W-HtM have largest point estimate, significantly bigger than N-HtM! Split based on net worth uninformative! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
Not all HtM households are created equal! P-HtM! W-HtM! 1/10 population! 1/5 population! young! low income! no wealth! middle age! middle income! substantial illiquid wealth! portfolio like N-HtM! persistent state! transient state! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
and it matters! P-HtM! small shocks: high MPC! W-HtM! small shocks: high MPC! large shocks: high MPC! large shocks: small MPC! target low income! target middle income! Kaplan, Violante and Weidner (2014) - The Wealthy Hand-to-Mouth!
Fiscal stimulus payments (a.k.a. tax rebates) Frequently used instrument to stimulate spending during recessions They are small, anticipated, temporary, (almost) lump-sum 1. 2009: American Recovery and Reinvestment Act refundable tax credit up to $400 per adult ( Making Work Pay ). 2. 2008: Economic Stimulus Act provided most households with payments of $300-$600 per adult and $300 per child. Total payout was $79b, or 2.2% of quarterly Y. 3. 2001: Economic Growth and Tax Relief Reconciliation Act: taxpayers entitled to rebate of up to $300 per adult. Total payout was $38b: 8% of quarterly G, or 1.7% of quarterly Y. 2/38
Preview of idea and results Structural model to study consumption response to fiscal stimulus payments Baumol-Tobin model of money-demand integrated within life cycle, incomplete markets framework two assets: 1. liquid asset + credit 2. illiquid asset s.t. transaction cost, but with: (i) higher return (ii) flow of consumption services Model generates wealthy hand-to-mouth households Consistent with SCF data Micro foundation for spender-saver models of fiscal policy Quantitatively account for observed rebate coefficients 4/38
Model Demographics: household i works for J work periods lives as retiree for J ret periods ( ) 1 σ+β [ Preferences: Vij 1 σ = c φ ij s1 φ ij (E j c ij : non-durable consumption s ij : housing services Earnings: idiosyncratic household earnings risk logy ij = χ j +z ij +u ij V 1 γ ij+1 ])1 σ 1 γ z ij is unit root, u ij is i.i.d. interpreted as measurement error No aggregate uncertainty 10/38
Model Two Assets: 1) liquid asset m ij m ij with return R m 1 q m R m R m + 2) illiquid asset a ij 0 with return R a 1 q a > R m + Housing: s ij = h ij + ζa ij+1 = purchases of housing services + flow from housing component of illiquid asset Transactions Cost: fixed money, utility, or time cost κ for each deposit into or withdrawal from illiquid account Government: taxes income progressively, consumption linearly, runs a progressive SS system and respects an intertemporal budget constraint 11/38
Model V j (a j,m j,z j ) = max{v N j (a j,m j,z j ),V A j (a j,m j,z j )} 12/38
Model V N j (a j,m j,z j ) = { ( ) max c φ 1 σ [ c j,h j,m j s1 φ j + β (E j j+1 subject to V 1 γ j+1 } 1 ])1 σ 1 σ 1 γ c j +h j +q m m j+1 m j +y j (z j ) T (y j,a j,m j,c j ) q a a j+1 = a j s j = h j + ζa j+1 V A j (a j,m j,z j ) = m j+1 m j { ( max c φ c j,h j,a j+1,m j s1 φ j j+1 subject to ) 1 σ+β (E j [ V 1 γ j+1 } 1 ])1 σ 1 σ 1 γ c j +h j +q a a j+1 +q m m j+1 a j +m j κ+y j (z j ) T ( ) s j = h j + ζa j+1 a j+1 0,m j+1 m j 12/38
Example of two-asset economy 0.3 0.25 0.2 0.15 0.1 0.05 Income 20 40 60 80 100 120 140 160 180 200 220 13/38
Example of two-asset economy 6 5 Liquid assets Illiquid assets 4 3 2 1 0 50 100 150 200 13/38
Example of two-asset economy 0.3 0.25 0.2 0.15 0.1 0.05 Income Consumption (1 asset, R=R a ) Consumption (1 asset, R=R m ) Consumption (2 assets) 20 40 60 80 100 120 140 160 180 200 220 [Euler Equations] 14/38
A wealthy hand-to-mouth household 6 5 Liquid assets Illiquid assets 0.3 0.25 4 0.2 3 0.15 2 1 0 50 100 150 200 0.1 0.05 Income Consumption 20 40 60 80 100 120 140 160 180 200 220 Agent features endogenous hand to mouth behavior Consumes the rebate check and does not respond to the news Small welfare gain of smoothing vs κ and R a R m Cochrane (1989) 15/38
Parametrization (quarterly model) Demographics: J work = 38 years (22-59) J ret = 20 years (60-79) 1 Preferences: σ = 1.5 (IES) γ = 4 (risk aversion) φ = 0.85 (1 - exp. share on housing) Earnings: Match growth of earnings inequality over life cycle Credit limit: m ij = 0.18 y ij (SCF) Government: expenditures, debt, tax system and SS system reproduce key features of US counterpart in 2001 Set {R m,r a, κ, β, ζ} from micro data on household portfolios 16/38
Calibration Assets Returns: Illiquid asset After-tax real return r a = 2.3% Liquid asset After-tax real return r m + = 1.5% Housing Services ζ: Match imputed rent of owner-occupied housing net of maintenance, mortgage interest, and property tax 4.0% (annualized) Discount Factor β: Match median illiquid wealth of $54, 600 0.953 (annualized) Borrowing rate r m : Match fraction of households with revolving cc debt of 20% 6% (annualized) Transactions Cost κ: Match fraction of hand-to-mouth households of 1/3 $1, 000 22/38
Tax rebate experiment In 2001 : Q2, govt announces all households will receive a tax rebate of $500 paid out at 2001 : Q2 (group A) or 2001 : Q3 (group B) After 10 years, permanent additional proportional earnings tax Two features of economic environment in 2001 1. Bush tax cuts (EGTRRA) Unexpected tax reform announced in 2001:Q2 (with rebate), takes effect gradually from 2002:Q1 2. Mild 2001-02 recession Unexpected 1.5% decline in earnings, over 3 quarters, followed by 8 quarter recovery 28/38
Rebate coefficient in the model 25 20 Rebate Coefficient (%) 15 10 5 0 0 500 1000 1500 2000 2500 3000 Fixed Cost ($) Rebate coefficient rising with κ (1% in one-asset model) 29/38
Role of hand-to-mouth households Rebate Coefficient (%) 25 20 15 10 5 50 40 30 20 10 Hand to mouth, no illiquid wealth Hand to mouth, positive illiquid wealth 0 0 500 1000 1500 2000 2500 3000 Fixed Cost ($) 0 0 500 1000 1500 2000 2500 3000 Fixed Cost ($) Rebate coef. rising with fraction of hand-to-mouth households 30/38
MPC across household types Rebate Coefficient (%) 25 20 15 10 5 Marginal Propensity to Consume (%) 60 50 40 30 20 10 0 All agents Hand to mouth agents Non hand to mouth agents 0 0 500 1000 1500 2000 2500 3000 Fixed Cost ($) 10 0 500 1000 1500 2000 2500 3000 Fixed Cost ($) Action entirely from hand-to-mouth households 31/38
Aggregate economic conditions 25 20 Rebate Coefficient (%) 15 10 5 Baseline 0 3% recession 15% recession 3% expansion 5 0 500 1000 1500 2000 2500 3000 Fixed Cost ($) Size of recession matters for borrowing and adjustment 34/38
Tax reform 40 Rebate Coefficient (%) 30 20 10 10% borrowing 0 10% borrowing + tax reform No borrowing No borrowing + tax reform 10 0 500 1000 1500 2000 2500 3000 Fixed Cost ($) Availability of credit determines sign of effect 35/38
Size-asymmetry of responses (Hsieh) Same households who have large MPC out of 2001 tax rebate do not respond to (larger) distributions from Alaskan Permanent Fund Rebate Coefficient (%) 25 20 15 10 5 $500 rebate $1000 rebate $2000 rebate $5000 rebate 0 5 0 500 1000 1500 2000 2500 3000 Fixed Cost ($) Larger rebate more adjustment lower consumption response 36/38
Liquid and illiquid wealth in SCF 2001 50th pct Mean Fraction After-Tax Positive Real Return Earnings + benefits (22-59) 41,000 52,745 Net worth 62,441 150,411 0.95 1.8 Net liquid wealth 2,630 31,001 0.77-1.5 Cash, checking, saving, MM 2,816 12,456 0.87-2.0 MF, stocks, bonds, T-Bills 0 19,935 0.28 1.9 Revolving credit card debt 0 1,617 0.20 Net illiquid wealth 54,600 119,409 0.93 2.3 Housing net of mortgage debt 31,000 72,592 0.68 2.0 Retirement accounts 950 34,455 0.53 3.8 1.35 Life insurance 0 7,740 0.27 0.4 Certificates of deposit 0 3,807 0.14 1.2 Saving bonds 0 815 0.17 0.4 38/38
Fiscal multipliers wrt G in the RBC Model Impossible for RBC model to generate Y multipliers greater than one or to produce positive C multipliers at any horizon. An increase in G creates a negative wealth effect, as taxes are expected to increase in the future to finance the new spending. Agents decrease consumption and work more. Wealth effects reinforced by negative substitution effects: Real wages decrease with the increase in work efforts and mitigates the rise in H and Y. This declines in C offsets most of the increase in G, thus Y < G p. 2 /13
Fiscal multipliers in the 21st century Question: Do differences in the distribution of wealth across countries lead to differences in their respective aggregate response to fiscal instruments? Document an empirical relationship between the size of fiscal multipliers and wealth inequality (measured by Gini) by estimating SVARs following the approach of Ilzetzki, Mendoza, and Vegh (2013) Want to compute the impact of an exogenous change in government consumption on output Result: the group of economies characterized by high wealth inequality have a significant positive response to an increase in government consumption, while the group of low inequality countries do not exhibit a significant change. p. 3 /13
IRF to G shock by level of Gini 0.75 0.5 0.25 0 0.25 0.5 0.75 1 Above Average Wealth Gini coefficient (>0.69) 1 0.75 0.5 0.25 0 0.25 0.5 0.75 1 Below Average Wealth Gini coefficient (<0.69) 1 0 1 2 3 4 0 1 2 3 4 Figure 1: Impulse Responses of Output to a St. Dev. Increase in Goverment Consumption (95% error bands in gray) p. 4 /13
Fiscal multipliers in the 21st century Regression: FM c = α+βgini c +ε Result: β = 0.13 (SD = 0.003) Note that Gini varies from 0.6 to 0.8 Build an infinite-horizon Aiyagari model with discount factor heterogeneity that matches Gini across countries Fiscal multiplier experiment: increase in G financed by reduction in lump-sum transfer p. 5 /13
Fiscal multipliers in the 21st century Impact Multiplier 0.15 CHF USA 0.1 0.05 CAN GBR SWE GER AUTPRT GRE NLD ESP JPN FRA ITA FIN 0.05 0.1 0.15 % of agents at the borrowing constraint Results point in the direction of the distribution of capital being a driver of fiscal multipliers across countries. p. 6 /13
Fiscal multipliers in the 21st century Explanation: Economies with low wealth inequality have fewer credit constrained individuals and fewer individuals with strong precautionary savings motive. This lowers the average marginal propensity to consume and reduces the fiscal multiplier." Wrong. In this class of models, output is supply determined. What matters is the change in labor supply. For agents near the constraints, a cut in transfers induces them to increase their labor supply for precautionary reasons. p. 7 /13
Fiscal multipliers in the 21st century 1.006 1.004 Labor Supply 1 0.998 Consumption 1.002 1.001 Output 1.002 0.996 1 1 0 1 2 3 4 5 0.994 0.999 0 1 2 3 4 5 0 1 2 3 4 5 USA FIN Figure 2: Impact of a G 1 = 2% increase in Government Consumption Financed by g 1 Quantitatively, effects are tiny: High MPC of HtM does not fuel an aggregate demand channel (no NK price rigidity) Few constrained people (no wealthy HtM) p. 8 /13
Transfer multipliers in the 21st century Majority of the increase in government spending during the great recession was government transfers to households, not G. Government expenditures and their components from 2007Q4 to 2009Q4. Country Percentage change in total expenditures (%) Fraction of increase in expenditures due to transfers (%) Fraction of increase in expenditures due to purchases (%) United States 14.2 75 27 Ireland 2.5 232 206 Italy 1.0 147 32 Luxembourg 4.3 145 60 Portugal 7.4 101 4 Japan 5.3 86 9 Sweden 6.5 69 52 Greece 17.2 75 22 France 6.0 74 46 Slovakia 20.7 64 34 Netherlands 15.9 63 41 Belgium 13.3 60 42 Germany 9.2 59 44 UK 17.3 52 47 Spain 11.1 47 50 Finland 11 43 56 Poland 30.2 40 52 Denmark 14.2 36 56 Austria 5.4 35 65 Czech Republic 10.3 34 62 Canada 11.2 31 76 Hungary 4.3 78 44 p. 9 /13
Transfer multipliers in the 21st century Key ingredients of the model are idiosyncratic uninsurable uncertainty about income and health, and...... nominal rigidities in price setting (NK production structure) Fiscal experiment: increase transfer by the same amount as in the US, i.e. T = 0.035 Y Target the additional transfers to the poor and unhealthy, as in the data Finance by increasing lump sum taxes p. 10 /13
Model: Household sector Household problem: v(a,ε,h) = max c,n,a log(c) χ(1 h)n+βe[v(a,ε,h )] s.t. c+a = Ra+wεn+d τ +T (ε,h) n {0, 1} ε Γ ε (ε) h Γ h (h) Negative shocks to health status (h low) increase the disutility of work, but have no effect on time endowment d = dividends from firm s profits p. 11 /13
Model: Technology and Government Final good producers: Y = zk a X 1 α, with aggregator: X = ( 1 0 x(j) 1 µ ) µ where K is rented from households and intermediate goods j are purchased from monopolistic firms operating with the linear technology x(j) = l(j), and equally owned by all household, making profits d(j) which they immediately distribute as dividends Equal ownership of firms across households These firms face costs of price adjustment ( inattentive producers ) Government budget constraint: G+ T (s,h)dλ = τ p. 12 /13
Mechanism: T& τ Model has three channels: Neoclassical wealth effect: high income people keep working, low income people never work, middle-income people are marginal and the negative wealth effect increases their labor supply Liquidity-constrained agents: the transfer of resources goes from those with low MPC towards those with a higher MPC (first-round demand effect) Nominal rigidities: with sticky prices, increased household demand translates into increased production, thus labor demand and wages rise which further increase demand, etc. Output increases by about 0.8% of GDP for a 3.4% (of GDP) increase in transfers: weak multiplier p. 13 /13