Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/325290 
Year of Publication: 
2025
Series/Report no.: 
DIW Discussion Papers No. 2132
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
Attitudes toward fiscal policy differ: fiscal conservatism and fiscal liberalism vary in their willingness to tolerate budget deficits. We challenge the view that such attitudes reflect national preferences. Instead, we offer an economic explanation based on a two-country Heterogeneous Agent New Keynesian model, bringing its implicit political economy dimension to the forefront. We compute the welfare implications of alternative fiscal policies at the household level to assess the conditions under which a policy commands majority support. Whether the majority supports fiscal conservatism or liberalism depends on a country's debt level, its wealth distribution, and the nature of the economic shock.
Subjects: 
HANK
Two-country model
Political Economy
Government debt
Fiscal policy
household heterogeneity
JEL: 
E32
H63
F45
Document Type: 
Working Paper

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