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Rule-of-Thumb Consumers and Labor Tax Cut Policy in the Zero Lower Bound

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  • Kaszab, Lorant

    ()
    (Cardiff Business School)

Abstract

This paper finds that labor tax cut can be an effective policy tool to mitigate the negative effects of a shock that made the zero lower bound on the nominal interest rate binding if the economy features rule-of-thumb households (besides Ricardian ones) and nominal rigidities in prices and wages. Our results are meant to contribute to the discussion initiated by Eggertsson (2010a) who found labor tax cut policy destabilising under zero nominal interest rate in a New Keynesian economy consisting only Ricardian consumers.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2012/13.

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Length: 29 pages
Date of creation: Jun 2012
Date of revision: Apr 2013
Handle: RePEc:cdf:wpaper:2012/13

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Keywords: Fiscal policy; zero lower bound; labor tax cut; New Keynesian;

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  1. Michael Woodford, 2010. "Simple Analytics of the Government Expenditure Multiplier," Discussion Papers 0910-09, Columbia University, Department of Economics.
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  12. Lorant, Kaszab, 2011. "Fiscal multipliers are not necessarily that large: a comment on Eggertsson (2010)," MPRA Paper 35612, University Library of Munich, Germany, revised 16 Dec 2011.
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  17. Mertens, Karel & Ravn, Morten O, 2012. "A Reconciliation of SVAR and Narrative Estimates of Tax Multipliers," CEPR Discussion Papers 8973, C.E.P.R. Discussion Papers.
  18. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  19. Gisle James Natvik, 2010. "Government spending shocks and rule-of-thumb consumers: The role of steady state inequality," Working Paper 2010/14, Norges Bank.
  20. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
  21. Harald Uhlig, 2010. "Some Fiscal Calculus," American Economic Review, American Economic Association, vol. 100(2), pages 30-34, May.
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