Staff Report 138

Tax Analysis in a Real Business Cycle Model: On Measuring Harberger Triangles and Okun Gaps

Gregory W. Huffman
Jeremy Greenwood

Published March 1, 1991

A tax distorted real business cycle model is parameterized, calibrated, and solved numerically in an attempt to measure the size of Harberger Triangles relative to Okun Gaps. In particular, the model constructed is used to study, quantitatively, the impact of various distortional government tax and subsidy schemes. It is shown that the government can use tax policy to stabilize cyclical fluctuations, and this is done for the economy being studied. The benefits of implementing such a stabilization policy are calculated and compared with the size of the welfare gains realized from reducing various tax distortions.

Published In: Journal of Monetary Economics (Vol. 27, No. 2, April 1991, pp. 167-190)

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