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

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  • Sagiri Kitao

Abstract

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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  • Sagiri Kitao, 2010. "Short-run fiscal policy: welfare, redistribution, and aggregate effects in the short and long run," Staff Reports 442, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:442
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    4. Almas Heshmati & Jungsuk Kim & Jacob Wood, 2019. "A Survey of Inclusive Growth Policy," Economies, MDPI, Open Access Journal, vol. 7(3), pages 1-18, July.

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