To Starve or Not to Starve the Beast?

Michael Kumhof, Daniel Leigh and Douglas Laxton

No 2010/199, IMF Working Papers from International Monetary Fund

Abstract: For thirty years prominent voices have advocated a policy of starving the beast cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.

Keywords: WP; present discounted value; utility function; Starve-the-beast; tax cuts; spending cuts; budget deficits; government debt; non-Ricardian behavior; welfare analysis; discount factor; government spending cut; contractionary consumption effect; eliminated government spending; share parameter; factor of firm; expenditure adjustment; Real interest rates; Government consumption; Discount rates; Consumption; Global (search for similar items in EconPapers)
Pages: 36
Date: 2010-09-01
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Citations: View citations in EconPapers (3)

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Journal Article: To starve or not to starve the beast? (2014)
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