State dependent fiscal multipliers with preferences over safe assests
Working Paper N° 374
I examine the eﬀect of ﬁscal policy at the zero lower bound if households have preferences over safe assets (POSA) calibrated consistent with evidence on household savings behavior and individual discount rates, and empirical estimates of the eﬀect of the supply of US government debt on government bond yields. POSA attenuate the eﬀect of changes in the household’s permanent-income on her consumption today and implies a wealth eﬀect from government bonds. It therefore strongly increases the multiplier of a permanent expenditure change, moving it much closer to the multiplier of temporary expenditure changes. The result becomes even stronger with credit constrained households and ﬁrms.