Short-run fiscal policy: welfare, redistribution, and aggregate effects in the short and long run

Sagiri Kitao

No 442, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper quantifies the effects of two short-run fiscal policies, a temporary tax cut and a temporary rebate transfer, that are intended to stimulate economic activity. A reduction in income taxation provides immediate incentives to work and save more, raising aggregate output and consumption. A temporary rebate is mostly saved and increases consumption marginally. Both policies improve the overall welfare of households, and the rebate policy especially benefits low-income households. In the long run, however, the debt accumulated to finance the stimulus and a higher tax to service the debt can crowd out capital and reduce output and consumption, causing welfare to deteriorate.

Keywords: Econometric models; Tax rebates; Public welfare; Households - Economic aspects; Fiscal policy; Equilibrium (Economics); Consumption (Economics); Tax incentives (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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Journal Article: Short-run fiscal policy: Welfare, redistribution and aggregate effects in the short and long-run (2010)
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