10fiscal Policy Uhlig

Fiscal Stimulus and Distortionary Taxation
Harald Uhlig1 Thorsten Drautzburg2
1 University of Chicago
Department of Economics
huhlig@uchicago.edu
2 tdrautzburg@uchicago.edu
January 8, 2010
Harald Uhlig (University of Chicago) Fiscal Stimulus and Distortionary Taxation January 8, 2010 1 / 70
Outline
1 Introduction
2 The model
3 The model: Details
Equations
Parameters
4 Results
Comparison to neoclassical growth.
No rules-of-thumb, no binding zero lower bound.
Including Rule-of-Thumb Consumers.
A binding zero Lower Bound.
Chemotherapy
5 Conclusions
Introduction
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
Introduction
Question and Answers
Question:
What is the effect of a fiscal stimulus as the ARRA?
What are the resulting fiscal multipliers?
Answers: ...
Introduction
Bernstein-Romer, Appendix: Multipliers
Romer−Bernstein output effects of a permanent stimulus of 1% of GDP

1.6
government spending
1.4
1.2
1
output effect
0.8
tax cut
0.6
0.4
0.2
0
2009 2010 2011 2012 2013
Date
Introduction
What I do:
Build on: Cogan-Cwik-Taylor-Wieland (2009), using

Smets-Wouters (CCTW-SW). Lump-sum taxes.
This paper:
! Medium-to-long term effects.
! Distortionary labor taxation ...
! ... plus: rule-of-thumb consumers.
! ... plus: binding zero lower bound.
Introduction
Key insights
Output response is modest. Fiscal multipliers are typically below

1.
Consumption response is typically negative or, at most, feebly
positive.
In the medium-to-long term:
! Pronounced output loss due to increased tax burden.
! Output losses large relative to initial increase.
Note: No or only moderate inflation tax on initial bond holders, i.e. no
“stealing from the Chinese”.
The model
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
The model
Smets-Wouters (2007): overview
Elaborate New Keynesian model.

Continuum of households. They supply household-specific labor
in monopolistic competition. They set wages. Wages are
Calvo-sticky.
Continuum of intermediate good firms. They supply intermediate
goods in monopolistic competition. They set prices. Prices are
Calvo-sticky.
Final goods use intermediate goods. Perfect competition.
Habit formation, adjustment costs to investment, variable capital
utilization.
Monetary authority: Taylor-type rule.
The model
Application to ARRA
CCWT: path for government spending. Government consumption.

Perhaps additively separable in utility.
CCWT: Fed-Funds = 0 for four quarters. “Jump” to “switched-off”
Taylor rule.
This paper:
! Distortionary labor taxation, consumption taxes, capital income
taxes. Steady state levels: Trabandt-Uhlig (2009).
! Details. Eg: all of labor income or without “union profits”? The
former.
! Speed to return to steady state debt level: ψτ ∈ [0, 1].
! ... plus: rule-of-thumb consumers: φ ∈ [0, 100%].
! ... plus: binding zero lower bound per discount shock, causing
recession.
The model
Tax rule
Remaining deficit, prior to new debt and labor taxes ...
ft = gov.spend.+subs.+old debt repaym.−cons.tax rev.,cap.tax rev.
... needs to be financed:
lab.tax rev. + new debt = ft
Steady state debt level, steady state taxes: f̄ .

Tax rule:
lab.tax rev.t − lab.tax rev. = ψτ (ft − f̄ )
The model: Details
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
The model: Details Equations
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
Extensions of Smets-Wouters (2007): Investment &

Consumption
Shadow price of investment – original SW with τ k = 0:
1
Q̂t = −q̂tb − (R̂t − Et [πt+1 ]) + ×
r∗k (1 − τ k ) + δτ k + 1 − δ
× [r∗k (1 − τ k )Et (r̂t+1
k
) + (1 − δ)Et (Q̂t+1 )], (1)
Consumption growth – SW with τ j = 0, j = l, c and “ex-dividend” wage

w∗h instead of w∗ :
1 h/µ 1 − h/µ
ĉt = Et [ĉt+1 ] + ĉt−1 − (q̂ b + R̂t − Et [π̂t+1 ])
1 + h/µ 1 + h/µ σ[1 + h/µ] t
[σ − 1][w∗ n∗ /c∗ ] 1 − τ l
− (Et [n̂t+1 ] − nt ), (2)
σ[1 + h/µ] 1 + τ c
Extensions of Smets-Wouters (2007): Wages
Evolution of wages:
(1 + β̄µ)ŵt − ŵt−1 − β̄µEt [ŵt+1 ]

! "
(1 − ζw β̄µ)(1 − ζw ) 1 d τtl
= [ĉt − (h/µ)ĉt−1 ] + ν n̂t − ŵt + ]
ζw 1 − h/µ 1 − τl
− (1 + β̄µιw )π̂t + ιw π̂t−1 + µ̄Et [πt+1 ] + λ̂w ,t , (3)
In the flexible economy:
1 d τtl
ŵt = [ĉt − (h/µ)ĉt−1 ] + ν n̂t + . (4)
1 − h/µ 1 − τl
Extensions of Smets-Wouters (2007): Tax rate and

gov’t deficit
Financing the current deficit:
! "
w∗ n∗ c∗ d τtl
τl + ŵt + n̂t + ,τt
c∗ Ȳ τl
# $
ψτ b b̂ t−1 − π̂ t c p k
µ[ĝta + ĝ s ] + − µτc ĉt − τ k [r∗k rtk + (rtk − δ)k̂t−1 ]
∗ ∗ ∗
=
µ Ȳ π∗ Ȳ Ȳ
Budget:
1 b∗ 1 b∗ c∗
ĝt + [b̂t−1 − π̂t ] = [b̂t − R̂t − q̂tb ] + τc ĉt +
µπ∗ Ȳ R∗ Ȳ Ȳ
! l "
w∗ n∗ c∗ d τt p k∗
+ τl + ŵt + n̂t + τ k [r∗k rtk + (rtk − δ)k̂t−1 ] . (6)
c∗ Ȳ τl µȲ
Unchanged SW equations: Cost and pricing equations
% t = (1 − α)ŵt + αr̂tk − γt ,
mc (7)
[1 − ζp β̄µ][1 − ζp ]
(1 + β̄µιp )π̂t = ιp π̂t−1 + β̄µEt [π̂t+1 ]+ A % t + λ̂p,t . (8)
mc
ζp
1 − ζp is the probability of (potential) price adjustment.
Unchanged SW equations: Capital services and

Capital Stock
Cost minimization yields:
k̂t = ŵt − r̂tk + n̂t . (9)
From the FOC with respect to capacity utilization:
1 − ψu k
r∗k r̂tk = a## (1)ût ⇒ ût ≡ r̂ . (10)
ψu t
The law of motion for capital implies:

! "
p x∗ p x∗ x∗
k̂t = 1 − p k̂t−1 + p q̂tx + p x̂t . (11)
k∗ k∗ k∗
Unchanged SW equations: Investment and FedFunds
The FOC for investment implies:
1 & ' 1
x̂t = x̂t−1 + β̄µEt (x̂t+1 ) + 2 ## [Q̂tk + q̂tx ], (12)
1 + β̄µ µ S (µ)
The interest rate rule:
R̂t = ρR R̂t−1 + [1 − ρR ][ψ1 π̂t + ψ2 (ŷt − ŷtflex )] + ψ3 [ŷt − ŷt−1 +

− (ŷtflex − ŷt−1
flex
)] + mst , (13)
Here: Introduce wedge between R̂t and the relevant interest rate for
the private sector for first periods.
Unchanged SW equations: Production and

Expenditure
The production technology for final goods:
Ȳ + Φ
ŷt = [αk̂t + (1 − α)n̂t + γt ], (14)
Ȳ
Spending identity with costs of capacity utilization:
c∗ x∗ r k k∗
ŷt = ĝt + ĉt + x̂t + ∗ ût . (15)
Ȳ Ȳ Ȳ
The model: Details Parameters
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
Parameters: Estimated SW parameters I

Parameter Value Description
δ 0.025 depreciation rate
λw 1.5 markup labor market
g 0.18 exogenous gov’t spending/GDP
µ 1 + 0.4312
100 trend growth rate
100
β 0.1657+100 discount factor
π∗ 1 + 0.7869
100 inflation rate
α 0.1901 capital share in production
σ 1.3808 1/intertemporal elasticity of substitution
Ȳ +Φ
Ȳ
= λp 1.6064 fixed cost and goods market markup
0.5187 net exports/gov’t exp. reaction to techn.
S ## (µ) 5.7606 investment adjustment cost
h 0.7133 habit persistence
Ξw 0.7061 calvo parameter labor market
Parameters: Estimated SW parameters II

ν 1.8383 labor supply elasticity
Ξp 0.6523 calvo parameter goods market
ιw 0.5845 indexation labor market
ιp 0.2432 indexation goods market
0.5462 capital utilization elasticity
ψ1 2.0443 Taylor rule reaction to inflation
ρR 0.8103 Taylor rule interest rate smoothing
ψ2 0.0882 Taylor rule long run reaction to output gap
ψ3 0.2247 Taylor rule short run reaction to output gap
Parameters: Calibration and Implications

b
Ȳ
0.63 Debt to GDP ratio
τk 0.36 capital tax
τl 0.28 wage tax rate
τc 0.05 consumption tax rate
0.1059 implied transfer payment
0.0097 Interest payments relative to GDP
0.2268 Labor tax revenue relative to GDP
0.0335 Capital tax revenue relative to GDP
0.0353 Consumption tax revenue relative to GDP
Results
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
Results Comparison to neoclassical growth.
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
A neoclassical growth model
Comparison to a neoclassical growth:

standard, but ..
... add distortionary labor taxes, capital income taxes,
consumption taxes.
Frisch elasticity: 1.
Calibration: Trabandt-Uhlig (2009).
Consider an anticipated permanent increase in government
spending.
Neoclass. vs SW-DU: announced, ψτ = 0.03.
Neoclass. SW-DU
Impulse response to gov.spending announcement shock ,ψτ=0.03
1 government spending (% ini
1.5
1 government
output spending(%init.output)
0.5 output
0.5
τ (wage tax rate, perc. points)
percent
τn (wage tax,perc. points)
percent
0 0
−0.5
consumption −0.5
−1
−1.5
−1 consumption
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2014
Year year
Neoclass. vs SW-DU: perm., ann., ψτ = 0.03. Long

run.
Neoclass. SW-DU
Impulse response to gov.spending announcement shock ,ψ =0.03
τ
1.5
2
1.5 1 government spending (% init. output)

1 government
output spending(%init.output) 0.5 output
0.5
percent
percent
0
0 τn (wage tax,perc. points)
−0.5 −0.5
consumption
−1 −1 consumption
−1.5
−1.5
−2
2010 2015 2020 2025 2030 2010 2015 2020 2025 2030 2035
Year year
Results No rules-of-thumb, no binding zero lower bound.
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
Short-run. ψτ = .03 vs lump-sum.
ψτ = 0.03 Lump-sum (CCWT)

0.8 0.8
0.6 Stimulus 0.6 Stimulus

% of init. output/perc. points

GDP GDP
0.4 0.4
0.2 τ (wage tax rate, perc. points) 0.2
0 0 τ (wage tax rate, perc. points)

Investment Consumption
−0.2 −0.2 Investment
Consumption
2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016
year year
Medium-run. ψτ = .03 vs lump-sum.
ψτ = 0.03 Lump-sum (CCWT)

0.8 0.8


GDP GDP
0.4 0.4
0.2 τ (wage tax rate, perc. points) 0.2
0 0 τ (wage tax rate, perc. points)

Investment Consumption
−0.2 −0.2 Investment
Consumption
2010 2015 2020 2025 2030 2035 2010 2015 2020 2025 2030 2035
year year
Fiscal stimulus: medium run. ψτ = 0.03.
0.8
% of init. output/perc. points 0.6 Stimulus
GDP
0.4
0.2 τ (wage tax rate, perc. points)
Investment
−0.2
Consumption
2010 2015 2020 2025 2030 2035
year
Spending increase, short-run output dynamics:

various ψτ .
0.5
ψ= 0.03
0.4
0.3
0.2 ψ= 0.10
0.1
0
percent
Lumpsum
−0.1
−0.2 ψ= 0.30
−0.3 ψ= 1.00
−0.4
2008 2010 2012 2014 2016
year
Spending increase, short-run fiscal multipliers
0.6
ψ= 0.03
0.4
Lumpsum
ψ= 0.10
0.2
0 ψ= 0.30
ψ= 1.00
−0.2
−0.4
−0.6
2008 2010 2012 2014 2016
year
Spending increase, short-run tax dynamics: various

ψτ .
0.8
ψ= 0.30
percentage points
0.6
0.4 ψ= 0.10ψ= 1.00
0.2
0 ψ= 0.03 Lumpsum
2008 2010 2012 2014 2016
year
Spending increase, short-run debt dynamics: various

ψτ .
5
percent of init. output
4
ψ= 0.10
3
ψ= 0.03
2
ψ= 0.30
1
0 ψ= 1.00
Lumpsum
2008 2010 2012 2014 2016
year
Results Including Rule-of-Thumb Consumers.
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
Consumption of the two agents

Modify consumption Euler equation to account for Rational Agents
only:
1 h/µ 1 − h/µ
ĉtRA = Et [ĉt+1 ]+ ĉt−1 − (q̂ b + R̂t −Et [π̂t+1 ])
1 + h/µ 1 + h/µ σ[1 + h/µ] t
[σ − 1][w∗ n∗ /c∗RA ] 1 − τ l
− (Et [n̂t+1 ] − nt ), (16)
σ[1 + h/µ] 1 + τc
The consumption of the Rule-of-Thumb consumer is determined from

their budget constraint:
! "
RoT l w∗ n∗ dτl
ĉt = (1 − τ ) RoT ŵt + n̂t − , (17)
c∗ 1 − τl
using n̂t = n̂tRoT = n̂tRA and n∗ = n∗RoT = n∗RA .
Aggregating consumption
Aggregate consumption:
c∗RA c RoT
ĉt = (1 − φ)ĉtRA + ∗ φĉtRoT , (18)
c∗ c∗
where
w∗ n∗ (1 − τ l ) + s∗
c∗RoT = ,
1 + τc
c∗ − φc∗RoT
c∗RA = .
1−φ
Distorting taxation and Rule-of-Thumb Consumers:

ψτ = 0.03, φ = 0.50.
0.6 output
government spending (% init. output)
0.4
percent
0.2
0 τ (wage tax rate, perc. points)

consumption
−0.2
−0.4
2008 2009 2010 2011 2012 2013 2014 2015

year
Medium run.
φ=0 φ = 0.5
0.8
0.6 output
0.6
government spending (% init. output) government spending (% init. output)
0.4
output 0.4
percent
percent
0.2
0.2
τ (wage tax rate, perc. points) 0 τ (wage tax rate, perc. points)
0 consumption
−0.2
−0.2
consumption −0.4
−0.4
2010 2015 2020 2025 2030 2035 2010 2015 2020 2025 2030 2035
year year
Comparing consumption patterns, ψτ = 0.03.
φ = 0: φ = 0.5:
0.5
0.6
output output
0.4
0.2
percent
percent
0
Rule of Thumb Rule of Thumb
0 consumption
−0.2
Rational Agent
consumption
−0.4
Rational Agent
−0.5
2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014
year year
Short run: ψτ = 0.03, vary rules-of-thumb fraction φ.
ψτ = 0.03, φ = 0: ψτ = 0.03, φ = 0.25:

0.8 0.8
0.6 0.6
government spending (% init. output) outputgovernment spending (% init. output)
0.4
output 0.4
percent
percent
0.2 0.2
τ (wage tax rate, perc. points) τ (wage tax rate, perc. points)
0 0
−0.2 −0.2 consumption

consumption
−0.4 −0.4
2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015
year year
ψτ = 0.03, φ = 0.50: ψτ = 0.03, φ = 0.75:

1
output
0.6 output
0.4
0.5 government spending (% init. output)
percent
percent
0.2 consumption

consumption 0
−0.2
−0.4
−0.5
2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015
year year
Short run: φ = 0.75, vary ψτ .
ψτ = 0.03 ψτ = 0.10
1 40
output
30
0.5 government spending (% init. output) 20

percent
percent
consumption
10
0
τ (wage tax rate, perc. points) 0 τ (wage tax rate,
government
output perc. points)
spending (% init. out
−10
−0.5
2008 2009 2010 2011 2012 2013 2014 2015
consumption
2008 2009 2010 2011 2012 2013 2014 2015
year year
Results A binding zero Lower Bound.
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
Zero nominal interest rates
Before (and following CCWT): for four quarters, “switch off” Taylor
rule and set nominal interest rate to zero instead.
SW/CCWT: steady state quarterly nominal interest rate is 1.55%
Now: recession per bond-premium-shock q̂tb : Consumers want to
save more at any given interest rate (Christiano, Eichenbaum and
Rebelo (2009)). Increase half-life of shock to one period (SW:
<0.5 periods).
Zero lower bound becomes binding with a bond-premium shock of
0.165, implying a (quarterly) change in GDP of -5.46%.
Assume shock of 0.20.
Results
Extreme scenario.
Examine differences between “with” and “without” stimulus.
Results are practically the same as before.
Erceg-Lindé, 2009.
Without stimulus, ψτ = 0.03.
Economic performance: Rates:

2 0
τ (wage tax rate, perc. points) inflation
percentage points (quarterly rate)

0 government spending (% init. output)
−0.5
−2 marginal cost
implied fed funds
percent
−1
−4 output
−6 −1.5 actual fed funds
−8
consumption
−2
2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012
year year
With stimulus, ψτ = 0.03.
Economic performance: Rates:

2 0
τ (wage tax rate, perc. points) inflation
percentage points (quarterly rate)

0
−0.5
−2 marginal cost
implied fed funds
percent
−1
−4 output
−6 −1.5 actual fed funds
−8 consumption
−2
−10
2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012
year year
Difference between with and without stimulus.
0.8
0.6
0.4
output
percent
0.2

0
−0.2
consumption
−0.4
2009 2010 2011 2012 2013 2014 2015 2016
year
SW-DU, Bondpremium-Shock with binding ZLB:

Difference, compared to “switching off”.
ZLB, ψ = 0.03: “switching off”, ψ = 0.03:

0.8 0.8

GDP GDP
0.4 0.4
percent
0.2 wage tax rate 0.2 τ (wage tax rate, perc. points)
0 0
Investment Investment
−0.2 −0.2
Consumption Consumption
2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016
year year
Rates: Difference between with and without stimulus.
0.1
implied fed funds

0.05
marginal cost
inflation
percent
0 actual fed funds
−0.05
−0.1
2009 2010 2011 2012 2013 2014 2015 2016
year
Results Chemotherapy
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
i = 0 for 0 quarters (ψτ = 0.03).
0.8
0.6
0.4 output
percent
0.2

0
−0.2
consumption
−0.4
2009 2010 2011 2012 2013 2014 2015 2016
year
0.8
0.6
0.4
output
percent
0.2

0
−0.2
consumption
−0.4
2009 2010 2011 2012 2013 2014 2015 2016
year
0.8
output
0.6
0.4
percent
0.2

consumption
−0.2
−0.4
2009 2010 2011 2012 2013 2014 2015 2016
year
1.4 output
1.2
0.8
percent
0.6
consumption
0.4
0.2
−0.2 τ (wage tax rate, perc. points)

−0.4
2009 2010 2011 2012 2013 2014 2015 2016
year
5 output
4 consumption
3
percent
1
0
−1
2009 2010 2011 2012 2013 2014 2015 2016
year

1
0
−1
percent
−2
−3
−4
−5
output
consumption
−6
2009 2010 2011 2012 2013 2014 2015 2016
year
i = 0 for 16 quarters (ψτ = 0.03). Long run
5 output
4 consumption
3
percent
1
0
−1
2010 2015 2020 2025 2030 2035
year
i = 0 for 12 quarters (ψτ = 0.03). Long run
1.4 output
1.2
0.8
percent
0.6
consumption
0.4
0.2
−0.2 τ (wage tax rate, perc. points)

−0.4
2010 2015 2020 2025 2030 2035
year
Comparing binding ZLB, “switching off” with proper

ZLB. 12 quarters
ZLB, 12 qtrs: switching off, 12 qtrs:
1.4
GDP 1.4 GDP
1.2
1.2

1
1
0.8 0.8
percent

0.4 0.4 Consumption
Consumption
0.2 0.2
wage tax rate 0 τ (wage tax rate, perc. points)

Investment
0 Investment
−0.2
−0.2
−0.4
2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016
year year
( ψτ = 0.03, scaling the interest rate down to 2/3 of actual value in interest
rate rule. High persistence, ρb = 0.9. Shocks: 2.38% for 16 qtrs, 2.02% for 12
qtrs, 1.57% for 8 qtrs, 1.43% for 5 qtrs. )
Comparing binding ZLB, “switching off” with proper

ZLB. 16 quarters
ZLB, 16 qtrs: switching off, 16 qtrs:
GDP 5 GDP
3
2.5 4

2
3
Consumption
1.5 Consumption
percent
2
1
Stimulus 1
0.5
Investment Stimulus Investment
0 0
−0.5 wage tax rate −1 τ (wage tax rate, perc. points)
2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016
year year
( ψτ = 0.03, scaling the interest rate down to 2/3 of actual value in interest
rate rule. High persistence, ρb = 0.9. Shocks: 2.38% for 16 qtrs, 2.02% for 12
qtrs, 1.57% for 8 qtrs, 1.43% for 5 qtrs. )
Evaluation
What does it take for the ZLB to bind?
Disclaimer: based on linear extrapolation of the case of a non-binding ZLB.

This is a problem because it neglects the feedback – since the recession is
stronger if the ZLB binds, a smaller shock is needed for a given decline in
interest rates.
Necessary initial bond premium shock to make ZLB

exactly binding at x quarters
Necessary size of bond shock for binding ZLB at x quarters
100
0.5 0.6 0.7
0.3
ρ =0.22
0.1 0.4
80 SW
0.8
Shock size (%)
60
40
20 used values
0.9
0
5 10 15 20
quarters
With a maximal contraction of 50%, ZLB of x quarters

obtains for ...
maximum horizon at which ZLB binds if peak GDP contraction < 50%
30
25
horizon (quarters)
20
15
10
SW
5
0
0 0.2 0.4 0.6 0.8 1
rho
Generating a binding ZLB at x horizons leads to...
Peak GDP response if ZLB binds at x quarters

0 0.9
0.8
−500 ρ =0.22
SW 0.7
0.6
0.3
GDP response (%)
−1000
−1500 0.40.5
−2000
−2500 0.1
−3000
0 5 10 15 20
quarters
Conclusions
Outline
1 Introduction
2 The model
Equations
Parameters
4 Results
Chemotherapy
5 Conclusions
Conclusions
Conclusions
In the context of this model, the impact of a government spending
stimulus ...
... is very sensitive to assumptions about taxes.
... on output is rarely larger than the government spending
increase
... is a comparatively larger output loss later on, due to the
increased tax burden.
Furthermore,
Consumption declines.
Rules-of-thumb agents do not change the results much.
Consumption may be feebly positive, the increase in output is
somewhat larger.
Binding zero lower bound: does not change the results much, if
temporary, and is extreme and fragile, if longer.
Therefore: tax considerations and medium-term impacts merit much
more attention!

10fiscal Policy Uhlig

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10fiscal Policy Uhlig

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Fiscal Stimulus and Distortionary Taxation

Harald Uhlig1 Thorsten Drautzburg2

Question and Answers

Bernstein-Romer, Appendix: Multipliers

Romer−Bernstein output effects of a permanent stimulus of 1% of GDP

Build on: Cogan-Cwik-Taylor-Wieland (2009), using

Output response is modest. Fiscal multipliers are typically below

Smets-Wouters (2007): overview

Elaborate New Keynesian model.

CCWT: path for government spending. Government consumption.

Remaining deficit, prior to new debt and labor taxes ...

ft = gov.spend.+subs.+old debt repaym.−cons.tax rev.,cap.tax rev.

... needs to be financed:

lab.tax rev. + new debt = ft

Steady state debt level, steady state taxes: f̄ .

Extensions of Smets-Wouters (2007): Investment &

Consumption growth – SW with τ j = 0, j = l, c and “ex-dividend” wage

Extensions of Smets-Wouters (2007): Wages

(1 + β̄µ)ŵt − ŵt−1 − β̄µEt [ŵt+1 ]

In the flexible economy:

Extensions of Smets-Wouters (2007): Tax rate and

Unchanged SW equations: Cost and pricing equations

Unchanged SW equations: Capital services and

k̂t = ŵt − r̂tk + n̂t . (9)

From the FOC with respect to capacity utilization:

The law of motion for capital implies:

Unchanged SW equations: Investment and FedFunds

The FOC for investment implies:

The interest rate rule:

R̂t = ρR R̂t−1 + [1 − ρR ][ψ1 π̂t + ψ2 (ŷt − ŷtflex )] + ψ3 [ŷt − ŷt−1 +

Unchanged SW equations: Production and

The production technology for final goods:

Parameters: Estimated SW parameters I

Parameters: Estimated SW parameters II

Parameter Value Description

Parameters: Calibration and Implications

Parameter Value Description

A neoclassical growth model

Comparison to a neoclassical growth:

Neoclass. vs SW-DU: announced, ψτ = 0.03.

Neoclass. vs SW-DU: perm., ann., ψτ = 0.03. Long

1.5 1 government spending (% init. output)

Short-run. ψτ = .03 vs lump-sum.

ψτ = 0.03 Lump-sum (CCWT)

0.6 Stimulus 0.6 Stimulus

% of init. output/perc. points

0.2 τ (wage tax rate, perc. points) 0.2

0 0 τ (wage tax rate, perc. points)

Medium-run. ψτ = .03 vs lump-sum.

ψτ = 0.03 Lump-sum (CCWT)

0.6 Stimulus 0.6 Stimulus

% of init. output/perc. points

0.2 τ (wage tax rate, perc. points) 0.2

0 0 τ (wage tax rate, perc. points)

Fiscal stimulus: medium run. ψτ = 0.03.

% of init. output/perc. points 0.6 Stimulus

0.2 τ (wage tax rate, perc. points)

Spending increase, short-run output dynamics:

Spending increase, short-run fiscal multipliers

Spending increase, short-run tax dynamics: various

0.4 ψ= 0.10ψ= 1.00

Spending increase, short-run debt dynamics: various

Consumption of the two agents

The consumption of the Rule-of-Thumb consumer is determined from