(Translated by https://www.hiragana.jp/)
Inequality, Fiscal Policy and COVID19 Restrictions in a Demand-Determined Economy
IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/27366.html
   My bibliography  Save this paper

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

Author

Listed:
  • Alan J. Auerbach
  • Yuriy Gorodnichenko
  • Daniel Murphy

Abstract

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.

Suggested Citation

  • Alan J. Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2020. "Inequality, Fiscal Policy and COVID19 Restrictions in a Demand-Determined Economy," NBER Working Papers 27366, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27366
    Note: EFG ME PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w27366.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    2. Claude d'Aspremont & Rodolphe Dos Santos Ferreira & Louis-André Gérard-Varet, 1990. "On Monopolistic Competition and Involuntary Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(4), pages 895-919.
    3. Luca Fornaro & Martin Wolf, 2020. "Covid-19 coronavirus and macroeconomic policy," Economics Working Papers 1713, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Murphy, Daniel, 2017. "Excess capacity in a fixed-cost economy," European Economic Review, Elsevier, vol. 91(C), pages 245-260.
    5. Brinca, Pedro & Holter, Hans A. & Krusell, Per & Malafry, Laurence, 2016. "Fiscal multipliers in the 21st century," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 53-69.
    6. Christoph E. Boehm & Nitya Pandalai-Nayar, 2022. "Convex Supply Curves," American Economic Review, American Economic Association, vol. 112(12), pages 3941-3969, December.
    7. Robert W. Fairlie, 2020. "The Impact of Covid-19 on Small Business Owners: The First Three Months after Social-Distancing Restrictions," CESifo Working Paper Series 8581, CESifo.
    8. Peter Ganong & Damon Jones & Pascal Noel & Diana Farrell & Fiona Greig & Chris Wheat, 2020. "Wealth, Race, and Consumption Smoothing of Typical Income Shocks," Working Papers 2020-49, Becker Friedman Institute for Research In Economics.
    9. Pascal Michaillat & Emmanuel Saez, 2015. "Aggregate Demand, Idle Time, and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(2), pages 507-569.
    10. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
    11. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2021. "Market Size, Trade, and Productivity," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 4, pages 87-108, World Scientific Publishing Co. Pte. Ltd..
    12. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Avoiding Liquidity Traps," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 535-563, June.
    13. Dennis Egger & Johannes Haushofer & Edward Miguel & Paul Niehaus & Michael Walker, 2022. "General Equilibrium Effects of Cash Transfers: Experimental Evidence From Kenya," Econometrica, Econometric Society, vol. 90(6), pages 2603-2643, November.
    14. Lawrence H. Summers, 2015. "Demand Side Secular Stagnation," American Economic Review, American Economic Association, vol. 105(5), pages 60-65, May.
    15. Ina Simonovska, 2015. "Income Differences and Prices of Tradables: Insights from an Online Retailer," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(4), pages 1612-1656.
    16. Bilbiie, Florin & Melitz, Marc J, 2020. "Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier," CEPR Discussion Papers 15583, C.E.P.R. Discussion Papers.
    17. Erik P. Gilje & Elena Loutskina & Daniel Murphy, 2020. "Drilling and Debt," Journal of Finance, American Finance Association, vol. 75(3), pages 1287-1325, June.
    18. Daniel Murphy, 2019. "Demand complementarities and cross-country price differences," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 253-278, February.
    19. Veronica Guerrieri & Guido Lorenzoni & Ludwig Straub & Iván Werning, 2022. "Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?," American Economic Review, American Economic Association, vol. 112(5), pages 1437-1474, May.
    20. Alan J. Auerbach & Yuriy Gorodnichenko, 2013. "Output Spillovers from Fiscal Policy," American Economic Review, American Economic Association, vol. 103(3), pages 141-146, May.
    21. Daniel Murphy, 2019. "Demand complementarities and cross‐country price differences," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 253-278, February.
    22. David Baqaee & Emmanuel Farhi, 2022. "Supply and Demand in Disaggregated Keynesian Economies with an Application to the COVID-19 Crisis," American Economic Review, American Economic Association, vol. 112(5), pages 1397-1436, May.
    23. David Cashin & Takashi Unayama, 2016. "Measuring Intertemporal Substitution in Consumption: Evidence from a VAT Increase in Japan," The Review of Economics and Statistics, MIT Press, vol. 98(2), pages 285-297, May.
    24. Diane Alexander & Ezra Karger, 2023. "Do Stay-at-Home Orders Cause People to Stay at Home? Effects of Stay-at-Home Orders on Consumer Behavior," The Review of Economics and Statistics, MIT Press, vol. 105(4), pages 1017-1027, July.
    25. Galí, Jordi, 2020. "The effects of a money-financed fiscal stimulus," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 1-19.
    26. Bilbiie, Florin O., 2020. "The New Keynesian cross," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 90-108.
    27. Jeffrey R. Campbell & Beverly Lapham, 2004. "Real Exchange Rate Fluctuations and the Dynamics of Retail Trade Industries on the U. S.-Canada Border," American Economic Review, American Economic Association, vol. 94(4), pages 1194-1206, September.
    28. Alan Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2020. "Local Fiscal Multipliers and Fiscal Spillovers in the USA," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 195-229, March.
    29. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
    30. Daniel Murphy, 2015. "How Can Government Spending Stimulate Consumption?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 551-574, July.
    31. Olivier Coibion & Yuriy Gorodnichenko & Michael Weber, 2020. "How Did U.S. Consumers Use Their Stimulus Payments?," Working Papers 2020-109, Becker Friedman Institute for Research In Economics.
    32. Jorge Miranda-Pinto & Daniel P. Murphy & Kieran Walsh & Eric Young, 2020. "Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus," Working Papers 20-07, Federal Reserve Bank of Cleveland.
    33. Goolsbee, Austan & Syverson, Chad, 2021. "Fear, lockdown, and diversion: Comparing drivers of pandemic economic decline 2020," Journal of Public Economics, Elsevier, vol. 193(C).
    34. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 985-985.
    35. Jorge Miranda-Pino & Daniel Murphy & Kieran Walsh & Eric Young, 2020. "A Model of Expenditure Shocks," Working Papers 20-04, Federal Reserve Bank of Cleveland.
    36. Yuliya Demyanyk & Elena Loutskina & Daniel Murphy, 2019. "Fiscal Stimulus and Consumer Debt," The Review of Economics and Statistics, MIT Press, vol. 101(4), pages 728-741, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Florin O. Bilbiie & Marc J. Melitz, 2020. "Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier," NBER Working Papers 28258, National Bureau of Economic Research, Inc.
    2. Graham, James & Ozbilgin, Murat, 2021. "Age, industry, and unemployment risk during a pandemic lockdown," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    3. Caporale, Guglielmo Maria & Kang, Woo-Young & Spagnolo, Fabio & Spagnolo, Nicola, 2022. "The COVID-19 pandemic, policy responses and stock markets in the G20," International Economics, Elsevier, vol. 172(C), pages 77-90.
    4. Fei Guo & Isabel Kit-Ming Yan, 2021. "Fiscal Decentralization and Fiscal Multiplier in China," GRU Working Paper Series GRU_2021_026, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    5. Miranda-Pinto, Jorge & Murphy, Daniel & Walsh, Kieran James & Young, Eric R., 2023. "Saving constraints, inequality, and the credit market response to fiscal stimulus," European Economic Review, Elsevier, vol. 151(C).
    6. Evi Pappa & Andrey Ramos & Eugenia Vella, 2022. "Which crisis support fiscal measures worked during the COVID-19 shock in Europe?," DEOS Working Papers 2217, Athens University of Economics and Business.
    7. Christian Bayer & Benjamin Born & Ralph Luetticke & Gernot J Müller, 2023. "The Coronavirus Stimulus Package: How Large is the Transfer Multiplier," The Economic Journal, Royal Economic Society, vol. 133(652), pages 1318-1347.
    8. Auerbach, Alan & Gorodnichenko, Yuriy & McCrory, Peter B. & Murphy, Daniel, 2022. "Fiscal multipliers in the COVID19 recession," Journal of International Money and Finance, Elsevier, vol. 126(C).
    9. Andrieș, Alin Marius & Ongena, Steven & Sprincean, Nicu, 2021. "The COVID-19 Pandemic and Sovereign Bond Risk," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    10. Efraim Benmelech & Nitzan Tzur-Ilan, 2020. "The Determinants of Fiscal and Monetary Policies During the Covid-19 Crisis," NBER Working Papers 27461, National Bureau of Economic Research, Inc.
    11. Bergant, Katharina & Forbes, Kristin, 2023. "Policy packages and policy space: Lessons from COVID-19☆," European Economic Review, Elsevier, vol. 158(C).
    12. Meier, Matthias & Pinto, Eugenio, 2024. "COVID-19 Supply Chain Disruptions," European Economic Review, Elsevier, vol. 162(C).
    13. Xingyuan Yao, 2021. "COVID-19 Pandemic and economic stimulus policy inequality: evidence from quasi-natural experiments," Working Papers 585, ECINEQ, Society for the Study of Economic Inequality.
    14. Juan Andres Espinosa-Torres & Jaime Ramirez-Cuellar, 2023. "The Effects of the Pandemic on Market Power and Profitability," Papers 2303.08765, arXiv.org.
    15. Chadha, Jagjit S. & Corrado, Luisa & Meaning, Jack & Schuler, Tobias, 2021. "Monetary and fiscal complementarity in the Covid-19 pandemic," Working Paper Series 2588, European Central Bank.
    16. Mr. Tidiane Kinda & Andras Lengyel & Kaustubh Chahande, 2022. "Fiscal Multipliers During Pandemics," IMF Working Papers 2022/149, International Monetary Fund.
    17. Wang, Zankai & Le, Thanh Tiep, 2022. "The COVID-19 pandemic’s effects on SMEs and travel agencies: The critical role of corporate social responsibility," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 46-58.
    18. Murphy, Daniel & Walsh, Kieran James, 2022. "Government spending and interest rates," Journal of International Money and Finance, Elsevier, vol. 123(C).
    19. Ablam Estel Apeti & Jean-Louis Combes & Xavier Debrun & Alexandru Minea, 2021. "Did Fiscal Space Foster Covid-19's Fiscal Stimuli ?," Post-Print hal-03351634, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Auerbach, Alan & Gorodnichenko, Yuriy & McCrory, Peter B. & Murphy, Daniel, 2022. "Fiscal multipliers in the COVID19 recession," Journal of International Money and Finance, Elsevier, vol. 126(C).
    2. Alan J. Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2019. "Macroeconomic Frameworks," NBER Working Papers 26365, National Bureau of Economic Research, Inc.
    3. Alan Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2020. "Local Fiscal Multipliers and Fiscal Spillovers in the USA," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 195-229, March.
    4. Murphy, Daniel & Walsh, Kieran James, 2022. "Government spending and interest rates," Journal of International Money and Finance, Elsevier, vol. 123(C).
    5. Miranda-Pinto, Jorge & Murphy, Daniel & Walsh, Kieran James & Young, Eric R., 2023. "Saving constraints, inequality, and the credit market response to fiscal stimulus," European Economic Review, Elsevier, vol. 151(C).
    6. Fornaro, Luca & Wolf, Martin, 2023. "The scars of supply shocks: Implications for monetary policy," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 18-36.
    7. Silvia Muzi & Filip Jolevski & Kohei Ueda & Domenico Viganola, 2023. "Productivity and firm exit during the COVID-19 crisis: cross-country evidence," Small Business Economics, Springer, vol. 60(4), pages 1719-1760, April.
    8. Etro, Federico, 2017. "Research in economics and macroeconomics," Research in Economics, Elsevier, vol. 71(3), pages 373-383.
    9. Mr. Tidiane Kinda & Andras Lengyel & Kaustubh Chahande, 2022. "Fiscal Multipliers During Pandemics," IMF Working Papers 2022/149, International Monetary Fund.
    10. Chen, Natalie & Juvenal, Luciana, 2022. "Markups, quality, and trade costs," Journal of International Economics, Elsevier, vol. 137(C).
    11. Shon M. Ferguson, 2015. "Endogenous Product Differentiation, Market Size and Prices," Review of International Economics, Wiley Blackwell, vol. 23(1), pages 45-61, February.
    12. Yoon J. Jo & Sarah Zubairy, 2021. "State dependent government spending multipliers: Downward nominal wage rigidity and sources of business cycle fluctuations," Working Papers 20210127-001, Texas A&M University, Department of Economics.
    13. Jaimovich, Esteban & Merella, Vincenzo, 2015. "Love for quality, comparative advantage, and trade," Journal of International Economics, Elsevier, vol. 97(2), pages 376-391.
    14. Abel Brodeur & David Gray & Anik Islam & Suraiya Bhuiyan, 2021. "A literature review of the economics of COVID‐19," Journal of Economic Surveys, Wiley Blackwell, vol. 35(4), pages 1007-1044, September.
    15. Macedoni, Luca & Weinberger, Ariel, 2022. "Quality heterogeneity and misallocation: The welfare benefits of raising your standards," Journal of International Economics, Elsevier, vol. 134(C).
    16. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    17. Parenti, Mathieu & Ushchev, Philip & Thisse, Jacques-François, 2017. "Toward a theory of monopolistic competition," Journal of Economic Theory, Elsevier, vol. 167(C), pages 86-115.
    18. Liu, Yue, 2016. "Price dispersion across countries and the heterogeneous impacts of income differences," Economics Letters, Elsevier, vol. 140(C), pages 64-67.
    19. Fabien Candau & Florent Deisting & Julie Schlick, 2017. "How Income and Crowding Effects Influence the World Market for French Wines," The World Economy, Wiley Blackwell, vol. 40(5), pages 963-977, May.
    20. Lin, Kefu & Zeng, Dao-Zhi, 2023. "International trade with binary preferences and heterogeneous productivity," Economic Modelling, Elsevier, vol. 122(C).

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:27366. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.