General-equilibrium effects of investment tax incentives

A new-Keynesian model with a nominal tax system is developed and used to study the macroeconomic effects of temporary tax-based investment incentives. Two claims regarding the effects of these incentives are examined: first that they are overstated in partial-equilibrium frameworks; and second that repeated use of such incentives by policymakers can ultimately be destabilizing. The results contradict the first claim and imply that the second claim is not general. The model is also used to compute the predicted effects of an investment tax incentive that has figured prominently in recent fiscal stimulus packages.