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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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  12. Gisle James Natvik, 2010. "Government spending shocks and rule-of-thumb consumers: The role of steady state inequality," Working Paper 2010/14, Norges Bank.
  13. Thorsten Drautzburg & Harald Uhlig, 2011. "Fiscal stimulus and distortionary taxation," CQER Working Paper 2011-01, Federal Reserve Bank of Atlanta.
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  17. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  18. Furlanetto Francesco & Seneca Martin, 2009. "Fiscal Shocks and Real Rigidities," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-33, February.
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  21. 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.
  22. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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