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Heterogeneous Consumption Response to Fiscal Spending Shocks in Developing Countries

I use household-level panel data collected from Thailand to analyze the heterogeneous effects of fiscal spending shocks. Households in developing countries do not face uniform liquidity and credit constraints, and this disparity leads to heterogeneity in how households change their consumption in response to fiscal spending shocks. I use a Structural Vector Auto-Regressive methodology to identify government spending shocks in Thailand from macroeconomic data and then apply the identified shocks in panel regressions with detailed and diverse household-level data. The paper’s main result is that the marginal propensity to consume (MPC) given a government spending shock is decreasing in the liquidity of a household and financial development of the region. The results also suggest other household characteristics such as education and composition lead to heterogeneity in response. I further find that food consumption increases with fiscal spending, with no significant change in non-food consumption.

Fields

Macroeconomics, Development economics, Finance

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