Another zero lower bound prediction bites the dust

 [[{“value”:”Popular New Keynesian macroeconomic models predict that cuts in various types of distortionary taxes are contractionary when monetary policy is constrained at the zero lower bound. We turn to a long span of history in the United Kingdom to test this hypothesis. Using a new long-run dataset of narrative-identified tax changes from 1918to 2020, we
The post Another zero lower bound prediction bites the dust appeared first on Marginal REVOLUTION.”}]] 

Popular New Keynesian macroeconomic models predict that cuts in various types of distortionary taxes are contractionary when monetary policy is constrained at the zero lower bound. We turn to a long span of history in the United Kingdom to test this hypothesis. Using a new long-run dataset of narrative-identified tax changes from 1918to 2020, we show that tax cuts are expansionary in both low interest rate environments and in more normal times. We also do not find evidence of a deflationary spiral in the response of inflation or real rates at the ZLB, suggesting a limited role for intertemporal substitution. We highlight a number of alternative mechanisms that can help rationalize our findings. Our results suggest that tax cuts may still be a useful tool to stimulate economic activity during periods when monetary policy is constrained.

That is from a recent paper by James Cloyne, Nicholas Dimsdale, and Patrick Hürtgen, forthcoming in the JPE.

The post Another zero lower bound prediction bites the dust appeared first on Marginal REVOLUTION.

 Economics, Uncategorized