Seminar: Axelle Ferriere, Sciences Po

Abstract: We study the effectiveness of consumption taxes to stabilize business cycle fluctuations in a HANK model. Analytically, we show that cutting consumption taxes can stimulate aggregate demand as effectively as increasing government spending. To the extent that households value private consumption more than public goods, such tax cuts also generate greater welfare improvements. Furthermore, when the welfare costs of recessions fall more on poorer households, consumption tax cuts may provide additional distributional welfare benefits.