NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Fiscal Stimulus and Distortionary Taxation

Thorsten Drautzburg, Harald Uhlig

NBER Working Paper No. 17111
Issued in June 2011
NBER Program(s):   EFG

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 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially.

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A data appendix is available at http://www.nber.org/data-appendix/w17111

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Document Object Identifier (DOI): 10.3386/w17111

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