Short-Run Fiscal Policy: Welfare, Redistribution, and Aggregate Effects in the Short and Long Run

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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 PDF PDF

35 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.

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