The Safety Asset Effect of Fiscal Expansion: A Heterogeneous-Agent DGE Analysis with Endogenous Uncertainty

【Authors】

ZHANG Zhewei, XU Zhiwei

【WorkUnit】

ZHANG Zhewei （Shanghai Jiao Tong University,200030）; XU Zhiwei （Fudan University,200433）

【Abstract】

The validity of Ricardian equivalence is widely discussed in public finance literature. In emerging economies like China, underdeveloped financial markets result in a scarcity of liquid assets, making government bonds a crucial liquidity tool for households. When faced with uncertainty, households hold government bonds as a precautionary measure to hedge against potential future income fluctuations, thereby smoothing consumption. In this context, Ricardian equivalence does not hold. Moreover, this paper identifies unemployment-induced wage volatility as a critical driver of income uncertainty, which fundamentally shapes precautionary behavior. Departing from conventional studies that focus on second-moment uncertainty shocks, this work demonstrates how first-moment negative shocks to corporate sectors propagate through endogenous unemployment channels. These mechanisms influence household consumption-investment decisions while amplifying macroeconomic instability through heightened precautionary motives.
This paper examines the effects of fiscal stimulus policies financed through sovereign bonds under endogenous uncertainty, employing a Dynamic General Equilibrium （DGE） model with heterogeneous households and multi-sector enterprises. It focuses on the macroeconomic impact of fiscal expansion funded by sovereign debt, particularly the liquidity properties of such debt. Theoretical analysis shows that negative technology shocks increase income uncertainty and unemployment, strengthening households’ precautionary motives and boosting demand for safety assets. This, in turn, crowds out consumption and amplifies economic fluctuations. When households face liquidity constraints and safety assets are scarce, government bonds emerge as critical safety assets in financial markets. Quantitative analysis finds that debt-financed fiscal stimulus causes short-term crowding out of consumption due to precautionary behavior. Over the long term, however, the increased supply of safety assets helps households manage risks and smooth consumption, hereby enhancing social welfare. Additionally, fiscal expansion focused on public investment is more effective in mitigating economic fluctuations than increased public consumption or transfer payments. The findings offer valuable insights for evaluating fiscal policies in today’s complex macroeconomic environment.
Based on the paper’s conclusions, policymakers should prioritize the structure of fiscal spending and the scale of debt to enhance the effectiveness of government debt and fiscal expansion. In the short term, stabilizing expectations through targeted fiscal expenditure is essential, including increasing public investment and social welfare to reduce uncertainty and stimulate consumption. Targeted support for low- and middle-income groups should also be increased. In the long term, increasing the deficit ratio and expanding debt can provide greater fiscal flexibility. The government should develop financial markets and expand investment options for the private sector. Expanding Over-The-Counter （OTC） transactions and diversifying bond types can attract more individual investors, fostering consumption and output growth. Future research could explore the role of other liquid assets, such as housing, to explore the interplay between real estate policies and fiscal policies. Additionally, incorporating price stickiness into the model could shed light on the synergistic effects of monetary and fiscal policies. 

【KeyWords】

Endogenous Uncertainty, Government Financing, Safe Assets, Heterogeneous-agent Model