Journal Article

Fiscal Policy with Heterogeneous Agents and Incomplete Markets

Jonathan Heathcote

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 72, issue 1, pages 161-188
Published in print January 2005 | ISSN: 0034-6527
Published online January 2005 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/0034-6527.00328
Fiscal Policy with Heterogeneous Agents and Incomplete Markets

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  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • Taxation, Subsidies, and Revenue

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I undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint. Temporary tax changes are found to have large real effects. In the benchmark model, a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost. Comparing the benchmark incomplete-markets model to a complete-markets economy, income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete.

Keywords: E62; H24

Journal Article.  14017 words.  Illustrated.

Subjects: Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Taxation, Subsidies, and Revenue

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