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Tax reduction for full-employment and debt dynamics: A Keynesian analysis by mathematics and simulation

Tanaka, Yasuhito (2019): Tax reduction for full-employment and debt dynamics: A Keynesian analysis by mathematics and simulation.

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Abstract

We examine the effects of a fiscal policy by tax reduction which realizes full-employment from a state of under-employment or with deflationary GDP gap. We show that the larger the growth rate of real GDP by tax reduction is, the smaller the debt-to-GDP ratio at the time when full-employment is realized is, and an aggressive fiscal policy by tax reduction for full-employment can reduce the debt-to-GDP ratio. Therefore, full-employment can be realized with smaller debt-to-GDP ratio than before the tax reduction policy. However, for this result we need that the marginal propensity to consume is considerably large.

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