Anti‐Stagflationary Tax Cuts and the Problem of Investment*

Ian McDonald ()

The Economic Record, 1984, vol. 60, issue 3, 284-293

Abstract: If prices are affected by both cost‐push and demand‐pull factors then a change in the policy mix towards fiscal ease can improve output, employment and the balance of trade without the price level rising. However the policy change may reduce investment and so affect the intertemporal allocation of resources. This paper derives conditions for tax cuts to ameliorate inflation and unemployment without a sacrifice of future output. Numerical examples suggest that one can have no presumption that the conditions are or are not likely to hold in general. The discussion is related to Corden's recent analysis of a ‘free lunch’.

Date: 1984
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https://doi.org/10.1111/j.1475-4932.1984.tb00863.x

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