Which expansionary fiscal policy at the ZLB? Tax cuts or government spending?
Eggertsson and Garga find that at the ZLB, and with either sticky prices or sticky information, tax cuts can have a contractionary effect on the economy. In particular, they argue that “[…] the paradoxical results for fiscal policy multiplier at the ZLB could be interpreted as reflecting a weakness of the Calvo model. This paper, however, clarifies that these paradoxes are not a product of the Calvo assumption, but rather are a fundamental feature of models with nominal rigidities, irrespective of its source, be it sticky prices or sticky information.”
The above table summarizes the numerical results for the two models, calibrated to produce a 10{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c} drop in output and 2{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c} annual deflation on impact.
Sticky Prices Versus Sticky Information: Does it Matter for Policy Paradoxes?
Authors: Gauti B. Eggertsson, Vaishali Garga
From: Brown University
