Fiscal Policy in a Networked Economy

93 Pages Posted: 3 Jan 2022 Last revised: 7 Jun 2023

See all articles by Joel P. Flynn

Joel P. Flynn

Yale University

Christina Patterson

University of Chicago

John Sturm

Massachusetts Institute of Technology (MIT)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2021

Abstract

Fiscal stimulus policies propagate through complex and overlapping economic networks. We study their efficacy and targeting in the presence of input-output linkages, regional trade, and household heterogeneity in employment relationships, marginal propensities to consume (MPCs), and consumption baskets. Theoretically, we derive estimable formulae for fiscal multipliers and characterize how network structures determine their size. Empirically, we estimate that multipliers vary substantially across policies, so targeting is important. However, virtually all variation in multipliers stems from differences in policies’ direct incidence onto households’ MPCs. Thus, while policies’ distributional effects depend on network structures, maximally expansionary fiscal policy simply targets households’ MPCs.

Suggested Citation

Flynn, Joel P. and Patterson, Christina and Sturm, John, Fiscal Policy in a Networked Economy (December 2021). NBER Working Paper No. w29619, Available at SSRN: https://ssrn.com/abstract=3998792

Joel P. Flynn (Contact Author)

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

Christina Patterson

University of Chicago ( email )

John Sturm

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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