Household relief programs: a macroeconomic analysis (with Alan Olivi and Dajana Xhani)

Abstract:

We investigate the impact of government interventions designed to support households during challenging macroeconomic episodes, particularly episodes of high inflation in necessity sectors such as food and energy. Using a multi-sector heterogeneous-agents model with non-homothetic preferences, we evaluate the welfare effects of fiscal support payments—potentially targeted to specific household groups—compared to price controls. We derive a social welfare function, which we use to decompose the welfare effects of fiscal policies. Applying the model quantitatively to the recent UK experience, we find that both the energy price cap and cost-of-living payments improved welfare, through both microeconomic and macroeconomic channels.