Fiscal Management of Aggregate Demand: The Effectiveness of Labor Tax Credits

Axelle Ferriere and Gaston Navarro ()
Additional contact information
Gaston Navarro: Federal Reserve Board

SciencePo Working papers Main from HAL

Abstract: We use a quantitative heterogeneous agent model with nominal rigidities and unemployment risk to analyze the effectiveness of several fiscal policies in stabilizing a demand-driven recession. The model delivers empirically realistic distributions of marginal propensities to consume (mpc) and labor participation elasticities (lpe) and matches the cross-sectional incidence of unemployment risk over the business cycle. We consider three fiscal stabilization packages: (i) a transfer to all low-income households, (ii) an increase in unemployment benefits to unemployed households, and (iii) an increase in labor tax credits to low-income working households. The labor tax credit is the most effective package to attenuate the recession, as it targets both high-mpc and high-lpe households and thus jointly stimulates labor and consumption. This result holds despite the recession resulting in higher unemployment risk.

Keywords: Heterogeneous Agents; Fiscal Policy; Optimal Taxation; Redistribution; Business Cycle (search for similar items in EconPapers)
Date: 2024-09-19
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-04748006v1
References: Add references at CitEc
Citations:

Downloads: (external link)
https://sciencespo.hal.science/hal-04748006v1/document (application/pdf)

Related works:
Working Paper: Fiscal Management of Aggregate Demand: The Effectiveness of Labor Tax Credits (2024)
Working Paper: Fiscal Management of Aggregate Demand: The Effectiveness of Labor Tax Credits (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-04748006

Access Statistics for this paper

More papers in SciencePo Working papers Main from HAL
Bibliographic data for series maintained by Contact - Sciences Po Departement of Economics ().