Working Paper: CEPR ID: DP5839
Authors: Tamim Bayoumi; Silvia Sgherri
Abstract: We estimate tax multipliers in a "Blanchard-Yaari" consumption model where Ricardian equivalence is broken because the private sector discounts the future at a faster rate than the real rate of interest. The model fits U.S. data since 1955 extremely well-entailing a discount wedge of around 20 percent a year and fiscal multipliers of 0.15-0.4-depending on the permanence of the change in taxes/transfers, and is much superior to one that assumes some consumers are fully Ricardian and others follow simple rules of thumb. The implied high private sector rate of discount has wide implications for policymakers.
Keywords: discount rates; fiscal multipliers; fiscal policy; Ricardian equivalence
JEL Codes: E21; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax cuts (H29) | higher consumption (D12) |
| increases in transfers (H87) | higher consumption (D12) |
| tax cuts (H29) | spending increase (H56) |
| higher discount rate (E43) | breaks Ricardian equivalence (D59) |
| temporary changes in income (E25) | less consumption increase (E21) |
| permanent changes in income (E25) | more consumption increase (E20) |