NBER Monetary Economics Program Meeting

Why It Matters

The findings challenge textbook Ricardian results and imply that pacing fiscal consolidation matters for macro stabilization and central‑bank performance, offering a rationale for delaying tax hikes to cushion recessions and ease monetary policy tradeoffs. Policymakers should weigh the stabilizing benefits of delayed adjustment against fiscal sustainability concerns.

Summary

Researchers presented an analytical and quantitative study showing that slower fiscal adjustment after recessions—i.e., delaying tax hikes to shrink budget shortfalls—can act as a powerful dynamic automatic stabilizer in an economy with non‑Ricardian households. Using an overlapping‑generations (perpetual youth) model as a proxy for HANK behavior, they show delayed adjustment raises aggregate demand, can cause output to overshoot so that net present value losses vanish, and reduces the eventual tax burden by stabilizing revenues. The paper derives conditions under which slow fiscal consolidation helps the central bank—chiefly when downturns are demand‑driven and taxes are sufficiently distortionary—and ties the policy’s appeal to two empirical sufficient statistics. U.S. parameter estimates imply that slower fiscal adjustment would likely support monetary policy in practice.