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Are Tax Cuts Really Expansionary?

  • N. Gregory Mankiw
  • Lawrence H. Summers

In this paper, we re-examine the standard analysis of the short-run effect of a personal tax cut. If consumer spending generates more money demand than other components of GNP, then tax cuts may, by increasing the demand for money, depress aggregate demand. We examine a variety of evidence and conclude that the necessary condition for contractionary tax cuts is probably satisfied for the U.S. economy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1443.

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Date of creation: Sep 1984
Date of revision:
Publication status: published as Mankiw, N. Gregory Mankiw and Lawrence H. Summers. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Vol. 18(November 1986): 415-429.
Handle: RePEc:nbr:nberwo:1443
Note: EFG PE
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  1. Ray C. Fair, 1977. "An Analysis of a Macroeconometric Model with Rational Expectationsin the Bond and Stock Markets," Cowles Foundation Discussion Papers 459, Cowles Foundation for Research in Economics, Yale University.
  2. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
  3. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-80, December.
  4. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  5. Holmes, James M & Smyth, David J, 1972. "The Specification of the Demand for Money and the Tax Multiplier," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 179-85, Jan.-Feb..
  6. Plosser, Charles I. & Schwert*, G. William, 1978. "Money, income, and sunspots: Measuring economic relationships and the effects of differencing," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 637-660, November.
  7. Cooley, Thomas F & LeRoy, Stephen F, 1981. "Identification and Estimation of Money Demand," American Economic Review, American Economic Association, vol. 71(5), pages 825-44, December.
  8. Barsky, Robert B & Mankiw, N Gregory & Zeldes, Stephen P, 1986. "Ricardian Consumers with Keynesian Propensities," American Economic Review, American Economic Association, vol. 76(4), pages 676-91, September.
  9. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
  10. Roberto Perotti, 2007. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Working Papers 13143, National Bureau of Economic Research, Inc.
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