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| Title: | | What fiscal policy is effective at zero interest rates?  |
| Authors: | | Eggertsson, Gauti B. |
| Issue Date: | | 2009 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 402 |
| Abstract: | | Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today. |
| Subjects: | | Tax and spending multipliers zero interest rates deflation |
| JEL: | | E52 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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