Investment Tax Incentives and Their Big Time-to-Build Fiscal Multiplier

Dimitrios Bermperoglou, Yota Deli and Sarantis Kalyvitis

No 201927, Working Papers from School of Economics, University College Dublin

Abstract: This paper studies how investment tax incentives stimulate output in a medium-scale DSGE model, which allows for a variety of fiscal funding mechanisms. We find that the horizon following a positive shock in investment tax incentives is crucial. The shock is highly expansionary in the long run with the relevant fiscal multiplier substantially exceeding 1, but this effect only becomes visible after two to three years. Our analysis indicates that a rise in the marginal product of labor and the demand for labor trigger this expansion, which is an effect that partial equilibrium studies ignore. Our analysis also contributes to the time-to-build profile of the fiscal multiplier. The results suggest that investment tax incentives are even more effective when nominal wages adjust faster.

Keywords: Private investment incentives; Investment tax credit; Fiscal multiplier (search for similar items in EconPapers)
JEL-codes: E32 E60 E62 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:201927

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