Abstract

We study the output responses to common fiscal transfer policies in a macroeconomic framework with a frictional labor market, incomplete asset market and nominal rigidities. The framework admits data-consistent macro-level dynamics of unemployment transitions and micro-level consumption responses to job loss, making it suitable for comparing the stabilizing effects of several household transfer policies and firm subsidies. Despite its richness, the model’s sequence-space representation is analytically tractable as a directed cycle graph between three blocks. This allows an “information-poor” ranking of fiscal multipliers on the basis of their partial-equilibrium fiscal costs alone, and identifies their key determinants. A baseline calibration predicts large differences in fiscal multipliers across policies. Relative to an increase in government consumption, the efficacy of universal or conditional transfers to households hinges on the degree of partial consumption insurance (through marginal propensities to consume and the response of precautionary savings). The relative efficacy of firm transfers depends on the elasticities of vacancies and separations to job values, the marginal propensity to consume out of dividend income, and the degree of nominal frictions.

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