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Tax Cuts, Redistribution, and Borrowing Constraints

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  • Tommaso Monacelli
  • Roberto Perotti

Abstract

With perfect credit markets, any (lump-sum) tax redistribution is neutral. We study the e¤ects of a tax redistribution in an economy with heterogenous agents and borrowing constraints. Under ?exible prices, a tax redistribution that favors "the poor" (i.e., the credit constrained) is neutral, or, possibly, even mildly contractionary. When nominal prices are sticky, that result is overturned: a tax redistribution from the savers to the constrained borrowers is expansionary on output. Key to the non-neutrality result is the agents?heterogenous sensitivity to movements in the credit premium.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 408.

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Date of creation: 2011
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Handle: RePEc:igi:igierp:408

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  1. Ricardo Reis & Hyunseung Oh, 2011. "Targeted Transfers and the Fiscal Response to the Great Recession," Discussion Papers 1011-10, Columbia University, Department of Economics.
  2. Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
  3. Jeffrey R. Campbell & Zvi Hercowitz, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," NBER Working Papers 11330, National Bureau of Economic Research, Inc.
  4. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  5. Becker, Robert A. & Foias, Ciprian, 1987. "A characterization of Ramsey equilibrium," Journal of Economic Theory, Elsevier, vol. 41(1), pages 173-184, February.
  6. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
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Cited by:
  1. Bilbiie, Florin Ovidiu & Monacelli, Tommaso & Perotti, Roberto, 2012. "Public Debt and Redistribution with Borrowing Constraints," CEPR Discussion Papers 9088, C.E.P.R. Discussion Papers.
  2. Tommaso Monacelli & Roberto Perotti, 2011. "Redistribution and the Multiplier," Working Papers 409, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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