IMF Working Papers

To Starve or Not to Starve the Beast?

By Michael Kumhof, Daniel Leigh, Douglas Laxton

September 1, 2010

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Michael Kumhof, Daniel Leigh, and Douglas Laxton. To Starve or Not to Starve the Beast?, (USA: International Monetary Fund, 2010) accessed November 21, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

For thirty years prominent voices have advocated a policy of starving the beast cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.

Subject: Consumption, Discount rates, Expenditure, Financial services, Government consumption, National accounts, Real interest rates

Keywords: Budget deficits, Consumption, Contractionary consumption effect, Discount factor, Discount rates, Eliminated government spending, Expenditure adjustment, Factor of firm, Global, Government consumption, Government debt, Government spending cut, Non-Ricardian behavior, Present discounted value, Real interest rates, Share parameter, Spending cuts, Starve-the-beast, Tax cuts, Utility function, Welfare analysis, WP

Publication Details

  • Pages:

    36

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2010/199

  • Stock No:

    WPIEA2010199

  • ISBN:

    9781455205295

  • ISSN:

    1018-5941

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