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Fiscal Stimulus and Distortionary Taxation

  • Thorsten Drautzburg

    (University of Chicago)

  • Harald Uhlig

    (University of Chicago)

We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially.

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File URL: http://econresearch.uchicago.edu/sites/econresearch.uchicago.edu/files/BFI_2011-005.pdf
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Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2011-005.

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Date of creation: 2011
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Handle: RePEc:bfi:wpaper:2011-005
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