On the efficiency of various expansionary fiscal policies and cuts in taxation rates in order to sustain economic activity

Séverine Menguy

Bulletin of Applied Economics, 2017, vol. 4, issue 2, 1-36

Abstract: We use a simple DSGE model in order to evaluate the efficiency of various fiscal policies intended to sustain economic activity and growth. A decrease in the consumption taxation rate appears as the most efficient fiscal policy. Indeed, as goods are then less expansive, it would imply an increase in the same proportion of all components of economic activity: private consumption and investment, as well as public expenditure. Besides, it would also strongly favor public investment in the composition of public expenditure, in order to increase the productivity of private factors and to satisfy the higher global demand. In comparison, a decrease in the capital taxation rate would reduce the capital cost, and it would favor private and public investment. However, the effect would be minor on private consumption and even negative on public consumption expenditure; the increase in global economic activity would then be more moderate. Finally, a decrease in the labor taxation rate would not be able to increase private economic activity, in the framework of our model, and it would favor public consumption to the detriment of the most productive public investment expenditure.

Keywords: DSGE model; budgetary policy; consumption taxation rate; capital taxation rate; labor taxation rate. (search for similar items in EconPapers)
JEL-codes: E61 E62 H21 (search for similar items in EconPapers)
Date: 2017
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