Growth Lab Research Seminar: Economic Implications of the Inflation Reduction Act

The Growth Lab's Research Seminar series is a weekly seminar that brings together researchers from across the academic spectrum who share an interest in growth and development. 

Speakers:

María C. Latorre, Associate Professor at Universidad Complutense of Madrid
David Suárez-Cuesta, Faculty Member at Universidad Complutense of Madrid 

Location: Wexner-102 / Zoom 

Whether attending in person or online please register in advance.

Abstract: We expand a dynamic Computable General Equilibrium (CGE) model to analyze the economic impact of the U.S. Inflation Reduction Act (IRA). This approach allows for a comprehensive economic analysis, considering both macro and microeconomic implications. The IRA encompasses a range of policy measures, both expansionary and contractionary, implemented between 2022 and 2031. By employing a combination of tax incentives and reforms, the IRA leads to a modest overall increase in U.S. GDP, reaching its peak in the mid-decade. However, these positive effects are tempered by inflationary pressures, resulting in reduced export competitiveness, except in sectors directly affected by the IRA, such as Motor Vehicles and Electrical Equipment. Additionally, the tax reforms aimed at financing the IRA primarily target corporations, leading to a significant contractionary effect on the economy. This results in a slight reduction in employment demand but an increase in real wages. We extend beyond the initial estimations provided by the Congressional Budget Office, which projected $393 billion in tax credits, by simulating two additional scenarios: 1) accounting for the uncapped effect of tax credits, considering that private investment announcements resulting from the IRA already exceed the $393 billion threshold in the first year of implementation; and 2) exploring an alternative funding approach through taxes on workers.