Africa Institute for Research in Economics and Social Sciences is organizing a seminar on Tuesday, January 16th, 2024 at 12:30 p.m at the Rabat Campus of Mohammed VI Polytechnic University on ''Consumption Tax Cuts vs Stimulus Payments''.

Our guest speaker for this event is Yvan Bécard, Assistant Professor of Economics at PUC-Rio.

ABSTRACT

Recent work shows that in macroeconomic models with non-Ricardian consumer behavior, uniform transfers are equivalent to interest rate cuts. That is, policymakers can use stimulus payments to substitute for conventional monetary policy when, say, the zero lower bound on short-term rates binds. We argue that in the same class of models, temporarily reducing consumption taxes delivers more stimulus than transfers — at the same cost to the taxpayer. Consumption tax cuts activate both income and substitution channels and prompt a strong response from all consumers across the wealth distribution. Simulating these policies in a quantitative New Keynesian model with heterogeneous households, we find aggregate output expands twice as much.