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The importance of being earners: Modelling the implications of changes to welfare contributions on macroeconomic recovery

Mosley, Max (2021): The importance of being earners: Modelling the implications of changes to welfare contributions on macroeconomic recovery. Published in: Covid-Economics No. 82 : pp. 99-142.

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Abstract

This paper demonstrates how changes to welfare generosity during recessions induces a greater than usual economic response. This is predicated on the assumption that welfare recipients are likely to be liquidity-constrained and therefore highly responsive to a change in temporary income. This would result in two conclusions, (i) the effects of fiscal stimulus can be maximised when channelled through welfare and (ii) fiscal consolidation from these programs will have a strong contractionary effect on domestic output. Using tax-benefit microsimulation model UKMOD, we find 71% of means-tested welfare recipients are liquidity-constrained. We use this finding to calibrate an open-economy New Keynesian macroeconomic model to therefore illustrate the economic implications of positive changes to the program’s generosity, finding an impact fiscal multiplier of 1.5. For cuts to contributions, we find a negative multiplier of 1.8, implying past cuts to welfare had a sizeable contractionary effect on macroeconomic recovery.

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  • The importance of being earners: Modelling the implications of changes to welfare contributions on macroeconomic recovery. (deposited 07 Jul 2021 13:19) [Currently Displayed]
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