Heterogeneous Consumers and Fiscal Policy Shocks

This paper studies stylized empirical facts regarding the e¤ects of unexpected changes in aggregate macroeconomic policies on consumers that are allowed to di¤er depending on their individual characteristics. In particular, we focus on …scal shocks due to their important e¤ects on consumers’welfare. We use data from the Consumption Expenditure Survey (CEX) to estimate impulse responses as well as multipliers for government spending and tax policy shocks. The main empirical …nding of this paper is that unexpected …scal shocks have substantially di¤erent e¤ects on consumers depending on their age, income levels, and education. In particular, the wealthiest individuals tend to behave according to the predictions of standard RBC models, whereas the poorest individuals tend to behave according to standard IS-LM (non-Ricardian) models, due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality, whereas tax policy shocks most negatively a¤ect the lives of the poor, more so than the rich, thus increasing consumption inequality. *Corresponding author: Barbara Rossi, CREI, Universitat Pompeu Fabra, c. Ramon Trias Fargas 25-27, Mercè Rodoreda bldg., 08005 Barcelona, Spain. Acknowledgments. We thank V. Ramey and D. Romer for sharing their data and replication codes, as well as J. Gali’, S. Schmitt-Grohe’, S. Zubairy and seminar participants at the 2011 Canadian Economics Association Conference, the 2011 Exchange Rate Conference at Duke, the Federal Reserve Bank of St. Louis, Duke, UPF, Goethe and Ohio State Universities for comments. J.E.L. Codes: E4, E52, E21, H31, I3, D1.