This paper develops a New Keynesian DSGE model incorporating the interaction between housing wealth and credit constraints to examine the distributional consequences of fiscal austerity. Our model features three distinct classes of households where heterogeneity in agents captures important characteristics of observed consumption behaviour. We find that although the costs of fiscal austerity are borne by all agents, the timing of sacrifice is substantially different. While credit-constrained households lose out in short to medium term following fiscal adjustment, interestingly, there is a reversal of fortune over a longer horizon; the credit unconstrained suffer in the long-term. A trade-off emerges between distributional equity and the output effects of fiscal consolidations. Finally, both the aggregate and the distributional consequences of fiscal austerity are determined much more by its composition than its speed.
|Publication status||Unpublished - 2016|