Fiscal policy in heterogeneous agent models

• Applicant: Professor Dr. Olaf Posch
• Subject Area: Economic Theory ; Statistics and Econometrics ; Economic Policy, Applied Economics
• Term: since 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 510995673

Most traditional approaches for analyzing fiscal policy measures are based on representative agent models. The aftermath of the financial crisis in 2008 and the effects of the Corona crisis since 2020 have demonstrated the drawbacks of this simplified approach for analyzing fiscal and monetary policies from a dynamic general equilibrium models perspective. It turned out that not all households have been equally affected by the aggregate shocks, such that the proposed directed policies could not be analyzed within this framework. On the one hand, the effects on consumption expenditures of different households depend strongly on their marginal propensity to consume and their access to liquidity. On the other hand, also reinforced by large interventions by central banks worldwide, wealth inequality has widened. It is therefore crucial for macroeconomic models to incorporate distributional effects. Heterogeneous agent models can contribute to quantifying the effects of policy measures and help identify new channels. This project aims to further develop the heterogeneous agent models à la Achdou et al. (2022) and their solution approaches to derive appropriate answers to important questions and to provide directed policy recommendations. As an illustration, the effects of fiscal policy measures such as a universal basic income and a CO2 tax will be analyzed subsequently. In particular, the effects of government taxes and transfers on labor supply, income distributions, and wealth distributions will be investigated. In addition, we study environmental policy instruments that provide incentives to reduce CO2 consumption. Thus, this project can contribute to avoiding possible climatic tipping points.

• DFG Programme: Research Grants