Scott Baker, Lorenz Kueng, Leslie McGranahan, Brian T. Melzer — The interaction of household finances and unconventional fiscal policy

The period of low demand and low interest rates during the Great Recession has prompted economists to consider new policies to stabilise the business cycle. The ‘zero lower bound’ on nominal interest rates prevented the use of interest rate reductions to stimulate consumption and investment in many developed economies. Researchers have proposed an alternative policy tool, ‘unconventional’ fiscal policy. This is a commitment to raise consumption taxes in the future (Feldstein 2002, Hall 2011, Correia et al. 2013).

Anticipation of higher consumption taxes can incentivise intertemporal substitution in the same way as traditional monetary policy, by raising the price of future consumption relative to current consumption. Households expecting higher future taxes move consumption to the present, increasing current demand.

But unconventional fiscal policy may not be effective in practice:...

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The interaction of household finances and unconventional fiscal policy

Scott Baker, Lorenz Kueng, Leslie McGranahan, Brian T. Melzer