Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures....

This paper addresses the effectiveness of fiscal policy at zero nominal interest rates. I analyze a stochastic general equilibrium model with sticky prices and rational expectations and assume that the government cannot commit to future policy. Real government spending increases demand by...