Fiscal Policy in a Networked Economy

97 Pages Posted: 27 Apr 2020 Last revised: 21 Dec 2021

See all articles by Joel P. Flynn

Joel P. Flynn

Massachusetts Institute of Technology (MIT) - Department of Economics

Christina Patterson

Northwestern University, Department of Economics

John Sturm

Massachusetts Institute of Technology (MIT) - Department of Economics

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Date Written: December 21, 2021

Abstract

Advanced economies feature complicated networks that connect households, firms, and regions. How do these structures affect the impact of fiscal policy and its optimal targeting? We study these questions in a model with input-output linkages, regional structure, and household heterogeneity in MPCs, consumption baskets, and shock exposures. Theoretically, we derive estimable formulae for the effects of fiscal policies on aggregate GDP, or fiscal multipliers, and show how network structures determine their size. Empirically, we find that multipliers vary substantially across policies, so targeting is important. Beneath these aggregate effects are large spatial and sectoral spillovers from policies directed to any one firm or household. However, virtually all variation in multipliers stems from differences in policies' direct incidence onto households' MPCs. Thus, while the distributional effects of fiscal policy depend on the detailed structure of the economy, maximally expansionary fiscal policy simply targets households' MPCs.

Keywords: Fiscal Policy, Shock Propagation, Input-Output Networks, Household Heterogeneity

JEL Classification: E21, C67, E32, E62

Suggested Citation

Flynn, Joel P. and Patterson, Christina and Sturm, John, Fiscal Policy in a Networked Economy (December 21, 2021). Available at SSRN: https://ssrn.com/abstract=3579456 or http://dx.doi.org/10.2139/ssrn.3579456

Joel P. Flynn (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Christina Patterson

Northwestern University, Department of Economics ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

John Sturm

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

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