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GTAP Resource #7182

"Dynamic Effects of the Inflation Reduction Act: a CGE Analysis"
by Suarez-Cuesta, David, Maria Latorre and Jan van Heerden


Abstract
This paper uses a dynamic Computable General Equilibrium model to analyze the macro and microeconomic implications of the Inflation Reduction Act (IRA) on the US economy. The IRA combines expansionary and contractionary policy measures. Its primary objective is to catalyze private investment in clean technologies and boost consumption through tax incentives and grants to households. Simultaneously, it incorporates tax reforms designed to prevent any escalation in the public deficit. Results show that the federal funding increase positively impacts GDP, peaking mid-decade due to the significant role of private consumption in the U.S. economy. However, domestic stimulus raises inflation and export prices, reducing external competitiveness, except in IRA-related sectors like Motor Vehicles, Electrical Equipment, and Other Mining, showing export growth. The stimulus enhances productivity, slightly reducing employment demand but significantly increasing real wages and long-term productive capacity, ultimately curbing inflation by the decade's end. The results indicate that the uncapped effect of the tax credits has a much more positive impact than the negative one in the form of a deficit increase. We examine the impact of an alternative funding approach in which tax increases predominantly fall on workers rather than industries. Results show a greater GDP increase but a significant reduction in household disposable income and savings.


Resource Details (Export Citation) GTAP Keywords
Category: 2024 Conference Paper
Status: Not published
By/In: Presented during the 27th Annual Conference on Global Economic Analysis (Fort Collins, Colorado, USA)
Date: 2024
Version:
Created: Suarez-Cuesta, D. (4/11/2024)
Updated: Suarez-Cuesta, D. (4/11/2024)
Visits: 128
- Renewable energy
- Infrastructure
- North America


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