IMF Working Papers

Transfers, Excess Savings, and Large Fiscal Multipliers

By Gene Kindberg-Hanlon

September 27, 2024

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Gene Kindberg-Hanlon. "Transfers, Excess Savings, and Large Fiscal Multipliers", IMF Working Papers 2024, 208 (2024), accessed November 18, 2024, https://doi.org/10.5089/9798400289354.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Consumption, Fiscal policy, Fiscal transfers, Income, Labor, National accounts, Wages

Keywords: Consumption, COVID-19, Excess savings, Fiscal multipliers, Fiscal transfers, Income, Inflation, Wages

Publication Details

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