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Balanced Budget Tax Cuts in a Liquidity‐Constrained Economy
Author(s) -
Prasad Vivek
Publication year - 2015
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12115
Subject(s) - economics , market liquidity , monetary economics , dividend , equity (law) , inflation tax , macroeconomics , monetary policy , finance , political science , law
This paper modifies the basic model of K iyotaki and M oore by introducing a government that levies distortionary taxes on wages and dividends, spends exactly its tax revenue and holds money supply constant. Discretionary across the board tax cuts relieve the effects of liquidity constraints that limit investment, and thereby stimulate economic activity in normal times. A discretionary cut in the rate of tax on dividends ameliorates the effects of an exogenous tightening of liquidity constraints, without unnecessary distortions, and is thus an alternative policy to the equity purchase programme proposed by K iyotaki and M oore.