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Fiscal stimulus and distortionary taxation

  • Thorsten Drautzburg
  • Harald Uhlig

We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act of 2009. We extend the benchmark Smets-Wouters New Keynesian model (Smets and Wouters, 2007), 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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Paper provided by Federal Reserve Bank of Atlanta in its series CQER Working Paper with number 2011-01.

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Date of creation: 2011
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Handle: RePEc:fip:fedacq:2011-01
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