Abstract:
This paper analyses the implications of government debt financing strategies for heterogeneous households. Two signicant contributions are made: first, household heterogeneity is modelled along agents' preference structure; second, the degree of valuation of public resources is allowed to vary across households. Taking into consideration the degree of financial constraints among households,with rich specification of the fiscal sector, the model is fitted to the UK data using Bayesian estimation approach. Evidence from the results shows that: (1) household agents differ considerablyin preference structure and valuation of public resources, and this influences agent-specific policy responses to fiscal adjustments; (2) Irrespective of the choice of fiscal strategy, financially constrained households are made worse off by the government consolidation plan, consuming less while working more compared to unconstrained households; (3) The government's debt consolidation plan can be frustrated by stringent fiscal policy which further constrains households' finances and increases the proportion of financially constrained households. Given the policy implications of this analysis, the fiscal authority must exercise great caution in implementing consolidation policies while addressing public debt crisis, possibly through selective implementation.
