The household effects of government spending

Author name: 
Giavazzi F
McMahon M

This paper provides new evidence on the e ects of scal policy by studying, using household-level data, how households respond to shifts in government spending. Our identi cation strategy allows us to control for time-speci c aggregate e ects, such as the stance of monetary policy or the U.S.-wide business cycle. However, it potentially prevents us from estimating the wealth e ects associated with a shift in spending. We nd signi cant heterogeneity in households’ response to a spending shock; the e ects appear vary over time depending, among other factors, on the state of business cycle and, at a lower frequency, on the composition of employment (such as the share of workers in part-time jobs). Shifts in spending could also have important distributional e ects that are lost when estimating an aggregate mul- tiplier. Heads of households working relatively few (weekly) hours, for instance, su er from a spending shock of the type we analyzed: their consumption falls, their hours increase and their real wages fall.

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