Cahn, Christophe, Fève, PatrickORCID: https://orcid.org/0009-0006-4064-7775 and Matheron, Julien (2026) The Long-Run Effects of Fiscal Rebalancing in a Heterogeneous-Agent Model. European Economic Review, vol. 184.

Abstract

This paper examines the long-run macroeconomic effects of a Fiscal Rebalancing reform that shifts taxation from payroll to consumption under a balanced-budget constraint. Using a heterogeneous-agent model calibrated to French data, we compare pre- and post-reform steady states. The reform increases both aggregate labor and capital, with a stronger impact on capital in the heterogeneous-agent model than in its representative-agent counterpart. It also heightens wealth inequality, as a disproportionate share of the increase in aggregate wealth accrues to wealthier households. A welfare analysis that accounts for transition dynamics reveals positive average welfare effects overall, although high-wealth and, separately, low-productivity households experience welfare losses. The results are robust across alternative calibrations and model specifications.

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