Fiscal Stimulus with Imperfect Expectations: Spending vs. Tax Policy / Riccardo Bianchi Vimercati, Martin S. Eichenbaum, Joao Guerreiro.

Format:

Book

Author/Creator:

Vimercati, Riccardo Bianchi.

Contributor:

National Bureau of Economic Research.

Eichenbaum, Martin S.

Guerreiro, Joao.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29134.

NBER working paper series no. w29134

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

This paper addresses the question: how sensitive is the power of fiscal policy at the ZLB to the assumption of rational expectations? We do so through the lens of a standard NK model in which people are dynamic-level-k thinkers. Our analysis weakens the case for using government spending to stabilize the economy when the ZLB binds. The less sophisticated people are, the smaller the government-spending multiplier is. Our analysis strengthens the case for using tax policy to stabilize output when the ZLB is binding. The power of tax policy to stabilize the economy during the ZLB period is essentially undiminished when agents do not have rational expectations. Our results are robust to whether or not Ricardian equivalence holds. Finally, we show that the way in which tax policy is communicated is critical to its effectiveness.

Notes:

Print version record

August 2021.