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Fiscal stimulus: an overlapping generations analysis

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  • Ross Guest
  • Anthony J Makin

Abstract

Motivated by the revival of Keynesian-inspired fiscal activism in response to the global financial crisis of 2008-09, this paper analyses stylised simulations of fiscal stimulus using an overlapping generations model that allows for feedback effects of stimulus spending on intertemporal consumption decisions of households, via the tax rate, wages and the interest rate. Simulations vary according to the size and type of stimulus, and the speed and way in which the stimulus is unwound. The main qualitative result is that the short run output gains from fiscal stimulus are transitory - the fiscal multiplier turns negative and remains negative long after the stimulus ends, mainly because it must be reversed in some way. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented.

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Bibliographic Info

Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 17 (2012)
Issue (Month): 2 (September)
Pages: 1-25

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Handle: RePEc:eis:articl:212guest

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  1. John Cogan & Tobias Cwik & John Taylor & Volker Wieland, 2009. "New Keynesian Versus Old Keynesian Government Spending Multipliers," Discussion Papers 08-030, Stanford Institute for Economic Policy Research.
  2. Mountford, A.W. & Uhlig, H.F.H.V.S., 2002. "What are the Effects of Fiscal Policy Shocks?," Discussion Paper 2002-31, Tilburg University, Center for Economic Research.
  3. Michael Woodford, 2010. "Simple Analytics of the Government Expenditure Multiplier," NBER Working Papers 15714, National Bureau of Economic Research, Inc.
  4. Luca Sessa & Libero Monteforte & Lorenzo Forni, 2007. "The general equilibrium effects of fiscal policy: estimates for the euro area," 2007 Meeting Papers 352, Society for Economic Dynamics.
  5. Holtz-Eakin, Douglas, 1994. "Public-Sector Capital and the Productivity Puzzle," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 12-21, February.
  6. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
  7. Davig, Troy & Leeper, Eric M., 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," CEPR Discussion Papers 7509, C.E.P.R. Discussion Papers.
  8. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
  9. Paul R. Masson & Tamim Bayoumi & Hossein Samiei, 1995. "International Evidenceon the Determinants of Private Saving," IMF Working Papers 95/51, International Monetary Fund.
  10. Sven Jari Stehn & Daniel Leigh, 2009. "Fiscal and Monetary Policy During Downturns," IMF Working Papers 09/50, International Monetary Fund.
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