Tax Cuts vs. Government Spending: Welfare and the Zero Lower Bound

Wednesday 7 November 2012, 4.15PM to 5.45pm

Speaker(s): Tommaso Monacelli, Bocconi University

Abstract

We study the welfare implications of two types of policies at the ZLB: (i) government spending; (ii) a tax cut financed with government debt. We show that, at the ZLB, government spending is always Pareto detrimental, irrespective of whether the economy features flexible or sticky prices, and of whether it features perfect or imperfect credit markets. A tax cut financed with government debt, by allowing an intertemporal redistribution between savers and constrained borrowers, is Pareto improving.

Location: Economics Staff Room (A/EC/202)