S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 319:
Fiscal Policy with Heterogeneous Agents and Incomplete Markets

Jonathan Heathcote

Abstract: I undertake a quantitative investigation into the short run effects of changes in the timing of taxes for a model economy in which heterogeneous households trade only one asset and face a borrowing constraint. This asset market structure implies that the consumption of low wealth households is sensitive to tax changes. The main finding of the paper is that when the wealth distribution in the model resembles that in the United States, market incompleteness accounts for large immediate aggregate consumption increases following tax cuts, and large consumption falls following tax increases. When taxes are lump-sum, for example, a dollar change in tax revenue is associated with a 15 cent change in aggregate consumption, compared to a response of roughly one third this size when markets are complete but households are finitely-lived. I find the response to tax changes to be larger if the interest rate is constant rather than determined endogenously, and smaller if taxes are proportional rather than lump-sum.

Keywords: Fiscal policy; heterogeneous agents; incomplete markets; Ricardian equivalence; borrowing constraints.; (follow links to similar papers)

JEL-Codes: E21; E25; E62; (follow links to similar papers)

42 pages, May 19, 1999, Revised July 28, 1999

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

hastef0319.pdf.zip    PDF-file (zipped) (1012kB) 
hastef0319.pdf    PDF-file (1.02MB) 
hastef0319.ps.zip    PKZipped PostScript (516kB) 
hastef0319.ps    PostScript file (2.65MB) 
Files with additional material for the paper:
hastef0319.fig.ps.zip    Figures, PKZipped PostScript (682kB) 
hastef0319.fig.ps    Figures, PostScript file (3.97MB) 
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:hastef:0319 This page was generated on 2014-12-14 19:22:57