We incorporate the liquidity trap and private behavioral preferences into a New Keynesian dynamic stochastic general equilibrium model to analyze fiscal multipliers. The results indicate that the influence of the liquidity trap on fiscal policy is driven by a combination of the interest rate transmission effect and the precautionary savings effect, showing a notable amplification of multipliers based on estimates from U.S. data. Furthermore, we examine two types of private behavioral preferences: habit formation and investor confidence. Habit formation significantly boosts short-term government spending multipliers while exhibiting diverse impacts on different types of taxation. Compared to superficial habits, deep habits result in flatter multiplier curves. Investor confidence, being highly sensitive to output fluctuations, enhances both spending and tax multipliers over the medium to long term. Additionally, the investor confidence channel slightly amplifies the expansionary effect of the liquidity trap on multipliers, contrasting with the impact of habit formation.

There is a strong case for boosting public investment in many countries based on identified country-specific structural weaknesses and the relatively low levels of such investment. This paper analyses the potential macroeconomic benefits of increased public investment using simulations on NiGEM. The results suggest that the supply-side benefits from raising potential output are likely to lead to more favourable macroeconomic outcomes than those from using many other standard fiscal instruments, although it takes many years for the full effect on potential output to accumulate. Variant model simulations also suggest that a fiscal stimulus will be more effective in the short term the less it is offset by monetary policy, making well-targeted policy initiatives especially effective when policy interest rates are at the zero lower bound. Globalisation implies that spillover effects from collective action are larger than in the past, boosting multipliers relative to the case where countries take individual action, particularly in the first two years after the policy change. Such spillovers are likely to be particularly important in small open European economies, especially those strongly integrated in European value chains.

Recent empirical research stresses the importance of foresight in tax policy analyses, because failing to model foresight adequately leads to two types of biases: a bias that relates to a mismatch of information sets in the presence of foresight, and one that arises when time variation in foresight is ignored. This paper incorporates tax foresight into a framework of time-varying structural vector autoregression models with stochastic volatility to account for both types of biases. This reveals the effects of changing degrees of tax foresight on U.S. tax policy. Two findings stand out: First, anticipated and unanticipated tax shocks show considerable time variations, suggesting that some tax reforms were more anticipated than others. Second, the time-varying bias reveals that tax foresight was higher during the 1980s and 1990s than during the 1960s and 1970s. The results compare well with the literature and find support in documented U.S. tax episodes.