The European Central Bank has published a working paper examining how sector-specific fiscal policy transmits through production networks when households differ in how much of extra income they spend. In the paper, the authors develop a multisector New Keynesian model and find that fiscal multipliers depend jointly on a sector’s position in supply chains and on whether the income generated by government spending reaches households with high marginal propensities to consume. Network linkages do not automatically strengthen fiscal stimulus. They can either amplify or dampen it depending on how income is redistributed across sectors and households. The paper notes that the views expressed are those of the authors and do not necessarily reflect those of the ECB. The analysis introduces an “intersectoral Keynesian cross” and an “MPC-augmented network multiplier” to describe these channels. It concludes that spending is most effective when directed to labor-intensive, downstream sectors that employ large shares of high-MPC households. Using U.S. Survey of Consumer Finances and Bureau of Economic Analysis data, the authors document marked cross-sector differences in balance sheets and hand-to-mouth household shares, ranging from more than 40% in agriculture to about 28% in communication and finance, insurance and real estate. In the calibrated U.S. model, fiscal multipliers vary materially by sector, with wholesale and retail trade around 1.2 and communication and finance, insurance and real estate below 1, implying a USD 1 increase in government spending there raises aggregate value added by about USD 0.91. The paper also finds that omitting either household heterogeneity or production networks can materially mismeasure fiscal effects, and that sectoral spending tends to redistribute income from Ricardian to hand-to-mouth households, while targeted transfers to constrained households in the services sector generate the strongest consumption response.
European Central Bank2026-06-03
European Central Bank publishes research showing sectoral fiscal multipliers depend on production networks and high MPC household exposure
The European Central Bank published a working paper analysing how sector-specific fiscal policy transmits through production networks when households differ in their marginal propensity to consume. Using a multisector New Keynesian model calibrated to U.S. data, the authors show that fiscal multipliers vary by sector and are highest when spending targets labour‑intensive, downstream sectors employing many high‑MPC households, while omitting household heterogeneity or production networks can materially misstate fiscal effects.