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Stimulus without debt in a severe recession

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  • Seidman, Laurence
  • Lewis, Kenneth

Abstract

This paper simulates the impact in a calibrated small macroeconomic model of a policy that attempts to apply sufficient effective stimulus in a severe recession without increasing the government deficit or debt, or inflation. This stimulus- without-debt policy has two components: (1) a large standard fiscal stimulus; (2) a non-standard monetary stimulus—a large transfer from the central bank to the treasury of the same magnitude as the fiscal stimulus, offset by an equal cut in the central bank's open market purchases so that the bank's transfer to the treasury is money-neutral. According to the simulations, the policy would achieve prompt full recovery from the severe recession without generating any adverse effect on government debt as a percent of GDP or on the inflation rate in either the short run or long run. The difference between the stimulus-without-debt policy and alternative stimulus policies is explained.

Suggested Citation

  • Seidman, Laurence & Lewis, Kenneth, 2015. "Stimulus without debt in a severe recession," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 945-960.
    • Handle: RePEc:eee:jpolmo:v:37:y:2015:i:6:p:945-960
    DOI: 10.1016/j.jpolmod.2015.09.002
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    Keywords

    Stimulus; Recession; Debt;
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