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Short-run fiscal policy: welfare, redistribution, and aggregate effects in the short and long run

  • Sagiri Kitao

This paper quantifies the effects of two short-run fiscal policies, a temporary tax cut and a temporary rebate transfer, that are intended to stimulate economic activity. A reduction in income taxation provides immediate incentives to work and save more, raising aggregate output and consumption. A temporary rebate is mostly saved and increases consumption marginally. Both policies improve the overall welfare of households, and the rebate policy especially benefits low-income households. In the long run, however, the debt accumulated to finance the stimulus and a higher tax to service the debt can crowd out capital and reduce output and consumption, causing welfare to deteriorate.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 442.

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Date of creation: 2010
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Handle: RePEc:fip:fednsr:442
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