Fiscal Stimulus and Distortionary Taxation

They extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital, and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.53 and modestly negative long-run multipliers around -0.36. The authors explain the central empirical findings with the help of a simple three equation New Keynesian model with sticky wages and credit-constrained households.