Fiscal Stimulus and Distortionary Taxation

Drautzburg, Thorsten; Uhlig, Harald

doi:10.2139/ssrn.1856165

Fiscal Stimulus and Distortionary Taxation

Becker Friedman Institute for Research in Economics Working Paper No. 2011-005

89 Pages Posted: 1 Jun 2011 Last revised: 13 Mar 2012

See all articles by Thorsten Drautzburg

Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Harald Uhlig

University of Chicago - Department of Economics

There 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 (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: Suggested Citation

Drautzburg, Thorsten and Uhlig, Harald, Fiscal Stimulus and Distortionary Taxation (May 30, 2011). Becker Friedman Institute for Research in Economics Working Paper No. 2011-005, Available at SSRN: https://ssrn.com/abstract=1856165 or http://dx.doi.org/10.2139/ssrn.1856165