Transfers, Excess Savings, and Large Fiscal Multipliers

IMF Working Papers, September 27, 2024

Source details

Uses a New Keynesian model augmented with myopia in households to allow realistic degrees of dissaving from wealth and accumulated transfers.
Combines household myopia with standard Keynesian features to generate highly persistent and large output responses to fiscal transfers and excess wealth.
Model impulse response functions (IRFs) are calibrated to match empirical fiscal multipliers from the tax stimulus SVAR literature.

The model can produce highly persistent and large output responses to fiscal transfers and excess wealth, consistent with recent empirical literature.
Model IRFs closely match the high fiscal multipliers reported in the tax stimulus SVAR literature.
The fiscal transmission described has important inflationary consequences.
In the COVID-era application for the United States, transfer payments that supported an accumulation of "excess savings" result in:
- inflation rising by over 1 percentage point for several years, and
- a persistent increase in output over the same horizon.
High debt and a weak fiscal rule can dull the transmission of monetary policy due to the wealth effect from higher interest payments.

Household myopia (leading to dissaving of wealth and transfers) is a key mechanism amplifying fiscal stimulus and generating persistent output effects.
Large transfer-based stimulus that increases household wealth can have significant and persistent inflationary effects.
Fiscal structure matters for monetary policy effectiveness: high public debt combined with a weak fiscal rule reduces monetary policy transmission through wealth effects linked to higher interest payments.

Subject areas: Consumption, Fiscal policy, Fiscal rules, Fiscal transfers, Income, Income shocks, National accounts.
Keywords include: Consumption, consumption function, COVID-19, EIP payment disbursement, excess saving, excess savings, Fiscal multipliers, Fiscal rules, Fiscal transfers, fiscal-monetary policy interaction, Global, IMF working paper research Department, Income, Income shocks, inflation, interest receipts, Phillips curve, rule result, transfer stimulus, wealth channel, wealth effect.