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Fiscal Policy with Heterogeneous Agents and Incomplete Markets

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  • Jonathan Heathcote

Abstract

I undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint. Temporary tax changes are found to have large real effects. In the benchmark model, a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost. Comparing the benchmark incomplete-markets model to a complete-markets economy, income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete. Copyright 2005, Wiley-Blackwell.

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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 72 (2005)
Issue (Month): 1 ()
Pages: 161-188

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Handle: RePEc:oup:restud:v:72:y:2005:i:1:p:161-188

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