Yvan Becard, PUC Río

Paper: Welfare Multipliers

Abstract: Transfers have become policymakers’ preferred fiscal stabilization tool, far ahead of government purchases. We compare these two policies in a range of New Keynesian models with heterogeneous households. We uncover a fundamental tradeoff between purchases and uniform transfers. Purchases deliver a higher fiscal multiplier and are more effective at reducing unemployment. But transfers stimulate private spending — ie household consumption and business investment — much more. Part of the explanation is uniform transfers better target the poor, who respond most to fiscal stimulus. We show that, as long as households value private goods more than public goods, welfare is systematically higher under the transfer policy. Thus, welfare multipliers differ from fiscal multipliers. Theory appears to back what governments already do.