Staff Reports
Short-Run Fiscal Policy: Welfare, Redistribution, and Aggregate Effects in the Short and Long Run
April 2010 Number 442
JEL classification: E2, E62, H24, H6

Author: 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.

Available only in PDFPDF35 pages / 307 kb

For a published version of this report, see Sagiri Kitao, "Short-Run Fiscal Policy: Welfare, Redistribution, and Aggregate Effects in the Short and Long Run," Journal of Economic Dynamics and Control 34, no. 10 (October 2010): 2109-25.

tools
By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.   Close