Wednesday, June 12, 2013

Keynesians, Remember: Tax Policy Is Fiscal Policy

According to an AER article by Correia, Farhi, Nicolini and Teles:
When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that, in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to low interest rates.
My own interpretation:
(a) Wasteful government spending? Always better to do nothing (CHECK).
(b) Forward guidance, quantitative easing? Always better to do nothing (CHECK).
(c) Reduce the tax load? Maybe (CHECK). But be prepared to pay the price later (CHECK).

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