Working Paper: NBER ID: w1443
Authors: N. Gregory Mankiw; Lawrence H. Summers
Abstract: In this paper, we re-examine the standard analysis of the short-run effect of a personal tax cut. If consumer spending generates more money demand than other components of GNP, then tax cuts may, by increasing the demand for money, depress aggregate demand. We examine a variety of evidence and conclude that the necessary condition for contractionary tax cuts is probably satisfied for the U.S. economy.
Keywords: tax cuts; aggregate demand; money demand; fiscal policy; Keynesian analysis
JEL Codes: E62; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax cuts (H29) | Aggregate demand (E00) |
| Consumer expenditure generates more money demand (D12) | Tax cuts are contractionary (E62) |
| Tax cuts (H29) | Money demand (E41) |
| Federal Reserve's response (E52) | Effectiveness of tax increases in reducing deficits (H69) |
| Tax increases (H29) | Federal Reserve's response (E52) |
| Tax cuts are contractionary (E62) | Balanced budget multiplier could be greater than one (E62) |