policymakers demonstrate

Fiscal and Monetary Policies after the Crises 433
Another perspective on the transfer issue is provided by Kaplan and Violante
(2014). These authors are motivated by the fact that the increases in household
consumption observed in response to fiscal stimulus packages are too
widespread to be accounted for by the relatively small fraction of low-wealth
consumers that are conventionally assumed to be liquidity-constrained in
heterogeneous-agent consumption analyses. 29 In their setting, households with
a large fraction of their wealth in illiquid assets (such as housing) are labelled
‘wealthy hand-to-mouth’: though their wealth is significant, its illiquidity stops
the households from using it to smooth their consumption response to economic
shocks such as unexpected job loss. Using data from the Survey of Consumer
Finances, Kaplan and Violante (2014) document that these households are substantial
in number, and their consumption indeed responds significantly to transitory
income shocks – their focus being on the 2001 US tax rebates. Again,
this was not a period in which the zero bound was binding, and the authors
do not consider its potential role in the response of consumption to transfer
spending.
Related evidence is provided by Surico and Trezzi (2015), who exploit the
unexpected redesign of the municipal tax on residential and nonresidential
properties in Italy at the peak of the Sovereign risk crisis (the ‘IMU’ tax) as
an effective increase in transfers away from households. They find an average
25-cent reduction in spending per euro of tax increase overall, but with vast
differences across groups with different degrees of wealth liquidity. The consumption
of owner occupiers with a mortgage and just one residential property
dropped by 90 per cent of the tax. The effects on richer households – real estate
owners with multiple properties – were instead negligible.
10.4.5 Central Bank Asset Purchases as a Solution?
The policy area that has arguably seen the most innovation since the crisis is the
use of large-scale asset purchases, both by central banks and national governments,
to try to influence macroeconomic outcomes. This has taken two forms.
First, central banks have experimented with ‘quantitative easing’ as a substitute
for cuts to nominal interest rates once the zero bound has been reached. This
was the justification for the European Central Bank’s decision to embark on a
programme of asset purchases in January 2015, mirroring earlier programmes
by the Federal Reserve and Bank of England. Second, governments and central
banks have shown willingness to buy up problem assets, in attempts to calm
erratic movements in financial markets – sometimes known as ‘credit easing’.
This was the reasoning behind the ECB’s Outright Monetary Transactions programme,
announced in August 2012, as well as the US government’s $700 billion
Troubled Asset Relief Programme of 2008. The main distinction between
the two approaches is that the first is perceived to be effective even when the