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Fiscal Policy with Heterogeneous Agents and Incomplete Markets

I undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint. Temporary tax changes are found to have large real effects. In the benchmark model, a temporary tax increase reduces aggregate consumption on impact by around 29 cents for every additional dollar of tax revenue raised. Comparing the benchmark incomplete markets model to a complete markets economy, income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~03-03-23.

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Date of creation: 03 Jun 2003
Handle: RePEc:geo:guwopa:gueconwpa~03-03-23
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