Consumption tax cuts vs stimulus payments
Mehdi Bartal and
Yvan Becard
Journal of Public Economics, 2024, vol. 239, issue C
Abstract:
Recent work shows that in macroeconomic models with non-Ricardian consumer behavior, uniform transfers are equivalent to interest rate cuts. That is, policymakers can use stimulus payments to substitute for conventional monetary policy when, say, the zero lower bound on short-term rates binds. We argue that in the same class of models, temporarily reducing consumption taxes delivers more stimulus than transfers — at the same cost to the taxpayer. Consumption tax cuts activate both income and substitution channels and prompt a strong response from all consumers across the wealth distribution. Simulating these policies in a quantitative heterogeneous agent New Keynesian model, we find output expands twice as much.
Keywords: Fiscal stabilization policy; Consumption taxes; Transfers; HANK (search for similar items in EconPapers)
JEL-codes: E62 E63 H31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:239:y:2024:i:c:s0047272724001634
DOI: 10.1016/j.jpubeco.2024.105227
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