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The theoretical literature generally finds that government spending multipliers are bigger than unity in a low interest rate environment. Using a fully nonlinear New Keynesian model, we show that such big multipliers can decrease when 1) an initial debt-to-GDP ratio is higher, 2) tax burden is higher, 3) debt maturity is longer, and 4) monetary policy is more responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below unity, especially with an initial high debt ratio. Our findings help reconcile the mixed empirical evidence on government spending effects with low interest rates.

Banks and Banking --- Inflation --- Public Finance --- Macroeconomics --- Business Fluctuations --- Cycles --- Monetary Policy --- Fiscal Policy --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Fiscal Policies and Behavior of Economic Agents: General --- National Government Expenditures and Related Policies: General --- Price Level --- Deflation --- Interest Rates: Determination, Term Structure, and Effects --- Debt --- Debt Management --- Sovereign Debt --- Macroeconomics: Consumption --- Saving --- Wealth --- Public finance & taxation --- Finance --- Expenditure --- Real interest rates --- Public debt --- Zero lower bound --- Prices --- Financial services --- Consumption --- National accounts --- Expenditures, Public --- Interest rates --- Debts, Public --- Economics --- United States

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The theoretical literature generally finds that government spending multipliers are bigger than unity in a low interest rate environment. Using a fully nonlinear New Keynesian model, we show that such big multipliers can decrease when 1) an initial debt-to-GDP ratio is higher, 2) tax burden is higher, 3) debt maturity is longer, and 4) monetary policy is more responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below unity, especially with an initial high debt ratio. Our findings help reconcile the mixed empirical evidence on government spending effects with low interest rates.

United States --- Banks and Banking --- Inflation --- Public Finance --- Macroeconomics --- Business Fluctuations --- Cycles --- Monetary Policy --- Fiscal Policy --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Fiscal Policies and Behavior of Economic Agents: General --- National Government Expenditures and Related Policies: General --- Price Level --- Deflation --- Interest Rates: Determination, Term Structure, and Effects --- Debt --- Debt Management --- Sovereign Debt --- Macroeconomics: Consumption --- Saving --- Wealth --- Public finance & taxation --- Finance --- Expenditure --- Real interest rates --- Public debt --- Zero lower bound --- Prices --- Financial services --- Consumption --- National accounts --- Expenditures, Public --- Interest rates --- Debts, Public --- Economics

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Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.

Macroeconomics --- Public Finance --- Taxation --- Corporate Taxation --- Fiscal Policy --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Personal Income and Other Nonbusiness Taxes and Subsidies --- Fiscal Policies and Behavior of Economic Agents: General --- Business Taxes and Subsidies --- Debt --- Debt Management --- Sovereign Debt --- Public finance & taxation --- Corporate & business tax --- Capital income tax --- Fiscal consolidation --- Corporate income tax --- Public debt --- Consumption taxes --- Taxes --- Fiscal policy --- Income tax --- Corporations --- Debts, Public --- Spendings tax --- United States

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