Fiscal Policy in a Networked Economy

98 Pages Posted: 3 Jan 2022 Last revised: 6 Jun 2022

See all articles by Joel P. Flynn

Joel P. Flynn

Massachusetts Institute of Technology (MIT) - Department of Economics

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

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.

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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)

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

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Cambridge, MA 02142
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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