Fiscal Stimulus and Distortionary Taxation

115 Pages Posted: 23 Nov 2013

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: November 13, 2013

Abstract

First Draft: January 2, 2010 This Draft: November 13, 2013 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 0.53 and modestly negative long-run multipliers around -0.36. We explain the central empirical findings with the help of a simple three equation New Keynesian model with sticky wages and credit-constrained households.

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 (November 13, 2013). FRB of Philadelphia Working Paper No. 13-46, Available at SSRN: https://ssrn.com/abstract=2358416 or http://dx.doi.org/10.2139/ssrn.2358416

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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