Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

E62: Fiscal Policy

Tax Cuts For Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment

Owen Zidar

This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER’s TAXSIM. I aggregate each tax change by income group and state. Variation in the income distribution across U.S. states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects.

Child-Related Transfers, Household Labor Supply and Welfare

Nezih Guner, Remzi Kaygusuz, Gustavo Ventura

What are the macroeconomic and welfare effects of expanding transfers to households with children in the United States? How do childcare subsidies compare to alternative policies? We answer these questions in a life-cycle equilibrium model with household labor-supply decisions, skill losses of females associated to non participation, and heterogeneity in terms of fertility, childcare expenditures and access to informal care.

Is Quantity Theory Still Alive?

Harald Uhlig, Pedro Teles

This paper seeks to understand the interplay between banks, bank regulation, sovereign default risk and central bank guarantees in a monetary union.  I assume that banks can use sovereign bonds for repurchase agreements with a common central bank, and that their sovereign partially backs up any losses, should the banks not be able to repurchase the bonds.

Home Production and Social Security Reform

Fang Yang, Wenli Li, Michael Dotsey

This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, we conduct a policy experiment where we eliminate the current pay-as-you-go Social Security System and study the steady state impact.

How Do Laffer Curves Differ Across Countries?

Mathias Trabandt, Harald Uhlig

We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt-Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income.

Dealing with Maturity: Optimal Fiscal Policy with Long Bonds

Albert Marcet, Elisa Faraglia, Andrew Scott

We study Ramsey optimal fiscal policy under incomplete markets in the case where the government issues only long bonds of maturity N > 1. We find that many features of optimal policy are sensitive to the introduction of long bonds, in particular tax variability and the long run behavior of debt. When government is indebted it is optimal to respond to an adverse shock by promising to reduce taxes in the distant future as this achieves a cut in the cost of debt. Hence, debt management concerns about the cost of debt override typical fiscal policy concerns such as tax smoothing.

Clearing Up the Fiscal Multiplier Morass

Eric Leeper, Nora Traum, Todd B. Walker

Bayesian prior predictive analysis of five nested DSGE models suggests that model specifications and prior distributions tightly circumscribe the range of possible government spending multipliers. Multipliers are decomposed into wealth and substitution effects, yielding uniform comparisons across models. By constraining the multiplier to tight ranges, model and prior selections bias results, revealing less about fiscal effects in data than about the lenses through which researchers choose to interpret data.

Fiscal Stimulus and Distortionary Taxation

Thorsten Drautzburg, Harald Uhlig

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.