Fiscal Stimulus and Distortionary Taxation

Drautzburg, Thorsten; Uhlig, Harald

doi:10.3386/w17111

Cited by 48 publications

(31 citation statements)

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“…That is, the impact of the ZLB dominates our results to the extent that if the repayment of debt is performed predominately after the ZLB period, even rapidly so, the results are in line with those presented above. With very large calibrations of φ x , larger deviations from our benchmark results can be obtained, especially for long‐run multipliers (as demonstrated by Drautzburg and Uhlig, ), as there is more than one fiscal instrument responding strongly during the period of monetary accommodation.…”

Section: Fiscal Outcomesmentioning

confidence: 67%

Section: Fiscal Outcomesmentioning

confidence: 86%

“…Drautzburg and Uhlig () illustrate that multipliers, especially in the long run, are significantly affected by both the instrument which repays the debt and the speed with which this is performed ( φ x in our model). For example, Drautzburg and Uhlig () find that using labour taxes (rather than lump‐sum taxes) to repay debts that arise as a result of higher government consumption can reduce one‐year multipliers by almost 20 per cent and can make long‐run multipliers go from positive to negative, and that these effects are amplified by increasing the speed of debt repayment. With our model, we have in principle 64 separate fiscal experiments that can be performed by varying first the instrument which is shocked and then the instrument which subsequently moves government debt to its steady state; furthermore, within these individual experiments the speed of debt repayment ( φ x ) can be varied.…”

Section: Fiscal Outcomesmentioning

confidence: 86%

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Expansionary Contractions and Fiscal Free Lunches: Too Good To Be True?

McManus

Ozkan

Trzeciakiewicz

2018

Scandinavian J Economics

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This paper builds a framework to jointly examine the possibilities of both expansionary fiscal contractions (austerity increasing output) and fiscal free lunches (expansions reducing government debt), arguments which in recent debates have been supported by the austerity and stimulus camps, respectively. We propose a new metric quantifying the budgetary implications of fiscal action, a key aspect of fiscal policy particularly at the monetary zero lower bound. We find that austerity needs to be highly persistent and credible in order to be expansionary, and stimulus needs to be temporary, responsive, and well-targeted in order to lower debt. We conclude that neither is likely, especially during periods of economic distress.

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Section: Fiscal Outcomesmentioning

confidence: 67%

Section: Fiscal Outcomesmentioning

confidence: 86%

Section: Fiscal Outcomesmentioning

confidence: 86%

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Expansionary Contractions and Fiscal Free Lunches: Too Good To Be True?

McManus

Ozkan

Trzeciakiewicz

2018

Scandinavian J Economics

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“…Others have considered policy rules with an interest rate smoothing term (Cogan et al. , Erceg and Lindé , Drautzburg and Uhlig , Aruoba, Cuba‐Borda, and Schorfheide ) . However, none of these papers has analyzed how the degree and type of policy inertia affect the government spending multiplier at the ZLB…”

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confidence: 99%

Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia

Hills¹,

Nakata²

2018

J of Money Credit Banking

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The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends, which in turn damps the expansionary effects of the government spending during the recession via expectations. In our baseline experiment intended to capture the effectiveness of the American Recovery and Reinvestment Act of 2009, the output multiplier at the ZLB is 1.9 when the weight on the lagged shadow rate is zero, and 0.5 when the weight is 0.85.

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“…There is monopolistic competition in intermediate goods markets and the labor market with Calvo frictions in price and wage adjustment, partial price and wage indexation and real frictions such as investment adjustment cost and habit formation. I add labor, capital and consumption taxes as in Drautzburg and Uhlig () and fiscal rules as in Leeper, Plante, and Traum () and Fernandez‐Villaverde et al (). Here, I only discuss the specification of fiscal and monetary policy.…”

Section: Empirical Specificationmentioning

confidence: 99%

A narrative approach to a fiscal DSGE model

Drautzburg

2020

Self Cite

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Structural DSGE models are used for analyzing both policy and the sources of business cycles. Conclusions based on full structural models are, however, potentially affected by misspecification. A competing method is to use partially identified SVARs based on narrative shocks. This paper asks whether both approaches agree. Specifically, I use narrative data in a DSGE-SVAR that partially identify policy shocks in the VAR and assess the fit of the DSGE model relative to this narrative benchmark. In developing this narrative DSGE-SVAR, I develop a tractable Bayesian approach to proxy VARs and show that such an approach is valid for models with a certain class of Taylor rules. Estimating a DSGE-SVAR based on a standard DSGE model with fiscal rules and narrative data, I find that the DSGE model identification is at odds with the narrative information as measured by the marginal likelihood. I trace this discrepancy to differences in impulse responses, identified historical shocks and policy rules. The results indicate monetary accommodation of fiscal shocks.Narrative approach to a fiscal DSGE model 803 signal-to-noise ratio of the measurement equation. With a proper prior, the models both here and in Caldara and Herbst (2019) require a Metropolis-within-Gibbs sampler. Unlike their setting, I allow for possibly missing instruments, an important issue in applied work.My result that the proxy SVAR identification is valid for a class of DSGE models is the second building block for my DSGE-SVAR: I provide conditions under which the instrument-identified VAR in Mertens and Ravn (2013) correctly identifies shocks and policy rule coefficients in models with standard Taylor-type policy rules, such as Leeper, Plante, and Traum (2010) and Fernandez-Villaverde, Guerron-Quintana, Kuester, and Rubio-Ramirez (2015). This property of the narrative VAR contrasts with traditional VARs that identify shocks through contemporaneous zero restrictions. DSGE models that match the VAR then need to assume that economic agents only react to policy shocks with a delay. The narrative VAR approach is valid if the data are generated from a widely used class of DSGE models, without restricting the timing. The key condition for my result is that the information set in the VAR captures the variables policy-makers pay attention to. This theoretical result mirrors the empirical result in Caldara and Herbst (2019) that credit spreads may be an important policy variable.My application contributes to the literature on fiscal and monetary policy DSGE models, which is important from a substantive point of view: With monetary policy constrained by the zero lower bound (ZLB), "stimulating" fiscal policy has gained a lot of attention and influential papers such as Christiano, Eichenbaum, and Rebelo (2011) have used quantitative DSGE models for the analysis of fiscal policies. Since the fiscal building blocks of DSGE models are less well studied than, say, the Taylor rule for monetary policy (e.g., Clarida, Galí, and Gertler (2000)), assessing the fiscal policy im...

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Fiscal Stimulus and Distortionary Taxation

Cited by 48 publications

References 0 publications

Expansionary Contractions and Fiscal Free Lunches: Too Good To Be True?

Expansionary Contractions and Fiscal Free Lunches: Too Good To Be True?

Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia

A narrative approach to a fiscal DSGE model

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