Inequality, Fiscal Policy and COVID19 Restrictions in a Demand-Determined Economy

Alan J. Auerbach, Yuriy Gorodnichenko, Daniel Murphy

NBER Working Paper No. 27366
Issued in June 2020, Revised in September 2020
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics, Public Economics

We evaluate the effects of inequality, fiscal policy, and COVID19 restrictions in a model of economic slack with potentially rigid capital operating costs. Inequality has large negative effects on output, while also diminishing the effects of demand-side fiscal stimulus. COVID restrictions can reduce current-period GDP by more than is directly associated with the restrictions themselves when rigid capital costs induce firm exit. Higher inequality is associated with larger restriction multipliers. The effectiveness of fiscal policies depends on inequality and the joint distribution of capital operating costs and firm revenues. Furthermore, COVID19 restrictions can cause future inflation, as households tilt their expenditure toward the future.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w27366