Finalidad y Objetivos de la Investigación

In the presence of MPC heterogeneity, targeted transfers which redistribute from one group in the population to another can potentially boost employment and output (Oh and Reis (2012), Jappelli and Pistaferri (2014a)). The results in Chapter 1 suggest a dilemma for policymakers attempting to design such targeted transfer programmes. Prior research on MPC heterogeneity such as Broda and Parker (2014) has found that financially constrained households have a higher MPC out of fiscal rebates. In such a scenario, targeted rebates to such households achieve a dual purpose; they stimulate aggregate demand more through the higher MPC, and they are provided to households who are more in need of financial support. While I do not take a stand on what the util- itarian benchmarks are, it is safe to say that most policymakers would want to provide financial support to people who have lost more wealth or income and are struggling

financially during a recession. In this scenario, there is no tradeoff between utilitarian and aggregate demand stabilization motives for targeted transfers; rebates can achieve both goals.

The empirical results suggest, however, that transferring resources to the regions most affected by a recession - who arguably need financial support the most - may have been less effective in stimulating aggregate demand during the Great Recession. If policymakers want to provide financial support to the individuals and regions worst affected by the recession, they might have to forego the possibility of a high aggregate MPC out of the rebates. While this could mean that many of these households pay their debts and stay current on mortgages, the aggregate demand stabilization goal becomes harder to meet. In this sense, there is a tradeoff between the utilitarian and aggregate demand stabilization motives for rebate distribution.

In order to fix ideas, it is useful to consider a stylized general equilibrium model that highlights the tradeoffs between the various motives for redistribution. A closed national economy consists of I regions which share a common currency and monetary policy. Households in regionispend some fractionαof their income on locally produced

goods, and the remaining 1−αon nationally produced goods. To create a role for fiscal

policy in stabilizing aggregate demand, it is necessary to assume that prices are not fully flexible (otherwise there would be no role for aggregate demand stabilization at all) and monetary policy is constrained (otherwise monetary policy would be able to fully stabilize demand, without the need for fiscal intervention). Suppose for simplicity that nominal wages are fixed in the short run (date 1) and flexible in the long run (dates t > 1). Thus at date 1 (which represents the recession), households may potentially be rationed in the labor market. Monetary policy is constrained by the zero lower bound; at datest >1, monetary policy is unconstrained, and targets a given level of inflation.

At date 1, a government raises a fixed amount of resources via lump sum taxes, and can choose how to distribute these resources to households in various regions via

nonnegative fiscal transfers. AppendixB.1 presents a full description of the model, and shows that under an optimal allocation of transfers across regions, in each region which receives positive transfers, you have

gj 1+τj αm j 1−αmj + m j 1−αmj ∑k gkτk 1−αmk I 1−α −∑k 1 1−αmk =1 (2.1)

wheregjdenotes the social marginal utility of the representative household in region j, relative to the marginal value of public funds for the government;τjdenotes the labor

wedge in region j, which is positive if that region is in a recession; and mj denotes the average MPC in region j. This equation states that the government is more willing to make transfers to region junder three conditions. First, transfers to jare more desirable if that region has a high social marginal utility gj (i.e. low consumption). Indeed, if all labor wedges were equal to zero, so there was no motive for aggregate demand stabiliza- tion, this formula would reduce to gj = 1, stating that the government seeks to smooth social marginal utility across regions. Second, to the extent that labor wedges are posi- tive (indicating a recession), transfers to jare more desirable if that region has a higher MPCmj, so the recipients will spend more on both local and nationally produced goods, increasing output and employment and closing labor wedges. Finally, to the extent that there is home bias in consumption (α >0), transfers to a region are more desirable if that

region experiences a more severe local recession (τj > 0), since households will spend

some of those transfers locally and reduce the local labor wedge.

Clearly then, if the same regions have high social marginal utility gj, high MPC mj, and deep local recessions τj, the policymaker faces no tradeoff: she should simply

target all transfers to these regions, which need the most, spend the most, and benefit the most from higher spending. The empirical results suggest, however, that regions with larger declines in house prices - which faced deeper local recessions3 - had the

3_{Whether these regions had higher or lower social marginal utility is less obvious, even abstracting} the possibility that a policymaker might assign different welfare weights to households in different re-

lowest MPC out of fiscal rebates. In this scenario, regionally targeted transfers are a less effective tool. Directing transfers towards regions experiencing the largest fall in house prices helps mitigate the most severe local recessions, but has a limited effect (especially at the aggregate level) because households in these regions are unwilling to spend. Targeting transfers to regions without a severe housing crisis, on the other hand, stimulates aggregate demand to a greater extent, but fails to direct help to the regions most affected.