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A Tax Rebate in A Recession: Is It Safe and Effective?

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  • Kenneth Lewis

    ()
    (Department of Economics,University of Delaware)

  • Laurence Seidman

    ()

Abstract

Is a tax rebate safe and effective? Simulations with an empirically-tested macro-econometric model are used to estimate the impact of the actual 2001 tax rebate in the U.S. and of a rebate twice as large repeated in three additional quarters, and the results of the simulations are interpreted in light of two important recent empirical studies of the spending of the 2001 rebate by households. Our simulations show that as long as a tax rebate is temporary and detriggered when the recession ends, its use during a recession does not pose a significant debt or inflation problem. We find that at the end of one year the larger repeated rebate would have reduced the unemployment rate from 5.9% to at least 5.2%. Thus, a triggered tax rebate is a safe and effective anti-recession policy.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2005/UDWP2005-20.pdf
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Bibliographic Info

Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 05-20.

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Length: 31 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:dlw:wpaper:05-20

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Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Keywords: Recession; Fiscal Policy; Tax Rebate;

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  1. Auerbach, Alan J. & Obstfeld, Maurice, 2004. "The Case for Open-Market Purchases in a Liquidity Trap," Center for International and Development Economics Research, Working Paper Series qt1dn4d9sr, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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  14. Coenen, Günter & Wieland, Volker, 2004. "Exchange-rate policy and the zero bound on nominal interest rates," Working Paper Series 0350, European Central Bank.
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