Inequality, Fiscal Policy and COVID19 Restrictions in a Demand-Determined Economy / Alan J. Auerbach, Yuriy Gorodnichenko, Daniel Murphy.

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Auerbach, Alan J

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w27366.Publication details: Cambridge, Mass. National Bureau of Economic Research 2020.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We evaluate the effects of inequality, fiscal policy, and COVID19 restrictions in a model of economic slack with potentially rigid capital operating costs. Inequality has large negative effects on output, while also diminishing the effects of demand-side fiscal stimulus. COVID restrictions can reduce current-period GDP by more than is directly associated with the restrictions themselves when rigid capital costs induce firm exit. Higher inequality is associated with larger restriction multipliers. The effectiveness of fiscal policies depends on inequality and the joint distribution of capital operating costs and firm revenues. Furthermore, COVID19 restrictions can cause future inflation, as households tilt their expenditure toward the future.

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June 2020.

We evaluate the effects of inequality, fiscal policy, and COVID19 restrictions in a model of economic slack with potentially rigid capital operating costs. Inequality has large negative effects on output, while also diminishing the effects of demand-side fiscal stimulus. COVID restrictions can reduce current-period GDP by more than is directly associated with the restrictions themselves when rigid capital costs induce firm exit. Higher inequality is associated with larger restriction multipliers. The effectiveness of fiscal policies depends on inequality and the joint distribution of capital operating costs and firm revenues. Furthermore, COVID19 restrictions can cause future inflation, as households tilt their expenditure toward the future.