Fiscal stimulus and distortionary taxation

Abstract

We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark medium-scale 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 compare and relate recent literature multiplier calculations to ours. We explain the central empirical findings with the help of a simple three equation New Keynesian model with sticky wages and creditconstrained households.

Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis

“…25 He obtains a positive and significant response of the ex ante real interest rate, which is in line with this study and a negative response of inflation, which is not the case here. Perotti (2005) estimates the cumulative response of consumption to be negative in the fourth quarter but positive in the twelfth quarter.…”

“…17 16 The model share of taxes in the total tax revenue are 0.49, 0.21, 0.30 for labour, capital and consumption tax respectively. For the period from 1987:Q2 to 2011:Q1 data show these averages to be 0.46 (42,52), 0.25 (20,27), 0.30 (25,32) -brackets show minimum and maximum values respectively. 17 We follow Harrison and Oomen (2010) and set the means of investment shocks at a higher level.…”

“…This effect prevails over the higher labour demand, therefore the wage rate decreases. 25 Perotti (2005) uses the Structural Vector Autoregression (SVAR) approach to estimate, among others, the effect of a government spending shock on key macroeconomic variables in the US, the UK and the euro area. He divides his sample into two parts, one from 1963:1 to 1979:4 and the second from 1980:1 to 2001:2, and reports cumulative responses in the fourth and twelfth quarters.…”

Effectiveness of the Australian Fiscal Stimulus Package: A DSGE Analysis

“…Cogan et al (2010) make use of a DSGE model to examine the effect of government purchases, tax cuts and transfers under the ARRA on US output. Drautzburg and Uhlig (2011) conduct a similar analysis of the ARRA in the context of a DSGE model with credit-constrained households, distortionary taxation and the zero lower bound on nominal interest rates. Coenen et al (2012), Forni et al (2009) and Cwik and Wieland (2011) examine the effects of EERP using estimated DSGE models for the euro area.…”

The Output and Welfare Effects of Government Spending Shocks Over the Business Cycle

“…Coenen et al (2012) calculate fiscal multipliers in seven popular DSGE models and conclude that the output multiplier can be far in excess of 1. Cogan et al (2010) and Drautzburg and Uhlig (2015) conclude, in contrast, that the multiplier is likely less than unity. Leeper et al (2011) use Bayesian prior predictive analysis not to produce a point estimate of the multiplier but rather to provide plausible bounds on it in a generalized DSGE framework.…”