Fiscal Stimulus and Distortionary Taxation

44 Pages Posted: 16 Jun 2011

See all articles by Thorsten Drautzburg

Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: May 30, 2011

Abstract

We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (Smets and Wouters, 2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially.

Keywords: Fiscal Stimulus, New Keynesian model, liquidity trap, zero lower bound, fiscal multiplier

JEL Classification: E62, E63, E65, H20, H62

Suggested Citation

Drautzburg, Thorsten and Uhlig, Harald, Fiscal Stimulus and Distortionary Taxation (May 30, 2011). ZEW - Centre for European Economic Research Discussion Paper No. 11-037, Available at SSRN: https://ssrn.com/abstract=1865252 or http://dx.doi.org/10.2139/ssrn.1865252

Thorsten Drautzburg (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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