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

  • Kaszab, Lorant

    ()

    (Cardiff Business School)

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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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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  19. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
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