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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 (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital, and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.53 and modestly negative long-run multipliers around -0.36. We explain the central empirical findings with the help of a simple three equation New Keynesian model with sticky wages and credit-constrained households.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-46.

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Date of creation: 2013
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Handle: RePEc:fip:fedpwp:13-46
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