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Title: Fiscal Policy Reactions and Impact Over the Labor Income Distribution

Citation Type: Miscellaneous

Publication Year: 2023

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Abstract: This paper investigates how fiscal policy reacts differently to negative income shocks on different points on the labor income distribution, and how fiscal policy shocks may have different effects at different points along the labor income distribution. Empirical examinations of fiscal policy typically consider a fiscal policy reaction function, where a single fiscal policy variable, such as the government budget deficit, responds to a variable related to the aggregate state of the economy, such as the output gap (in addition to outstanding government debt and allowing persistence). In this paper, I consider a fiscal policy reaction function where fiscal policy may respond to a weighted average of multiple quantiles along the labor income distribution. I also examine eight different fiscal policies variables including four types of government transfer variables shown to be countercyclical, government consumption and government investment, and personal versus corporate tax revenue. Embedding the fiscal policy variables into a Bayesian structural vector autoregression (SVAR), I estimate both the reaction of each of these fiscal policy variables to shocks to points along the labor income distribution, and the multiplier effect of fiscal policy shocks over time on points along the income distribution. With impulse response functions predicted by the SVAR, I show which fiscal policy variables are more reactive to shocks along the income distribution, which have larger multiplier effects, and how variable fiscal policy variables attenuate or exacerbate labor income inequality.

Url: https://www.murraylax.org/research/fiscaldist.pdf

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Authors: Murray, James

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Data Collections: IPUMS USA, IPUMS CPS

Topics: Labor Force and Occupational Structure, Poverty and Welfare

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