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Fiscal multipliers in war and in peace

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  • David Andolfatto

Abstract

Proponents of fiscal stimulus argue that government spending is needed to replace the private spending normally lost during a recession. Estimates of the so-called fiscal multiplier based on wartime episodes are used to support the proposition that a peacetime intervention can "stimulate" the economy in a desirable manner. The author argues that a wartime crisis is fundamentally different from a peacetime economic crisis. What may be desirable in war is not necessarily so in peace. This is demonstrated formally in the context of a simple neoclassical model, which delivers fiscal multipliers consistent with the wartime evidence. The optimal fiscal policy, whether it entails expansion or contraction, is independent of the size of the fiscal multiplier.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2010)
Issue (Month): Mar ()
Pages: 121-128

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Handle: RePEc:fip:fedlrv:y:2010:i:mar:p:121-128:n:v.92no.2

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Keywords: Fiscal policy - United States;

References

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  1. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  2. Alan Bollard, 2009. "General discussion: activist fiscal policy to stabilize economic activity," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 399-411.
  3. Thomas A. Garrett & Russell M. Rhine, 2008. "Institutions and government growth: a comparison of the 1890s and the 1930s," Working Papers, Federal Reserve Bank of St. Louis 2008-020, Federal Reserve Bank of St. Louis.
  4. Alan J. Auerbach & William G. Gale, 2009. "Activist fiscal policy to stabilize economic activity," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 327-374.
  5. Monacelli, Tommaso & Perotti, Roberto & Trigari, Antonella, 2010. "Unemployment Fiscal Multipliers," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7728, C.E.P.R. Discussion Papers.
  6. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 112-32, March.
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Cited by:
  1. David Andolfatto & Marcela M. Williams, 2012. "Many moving parts: the latest look inside the U.S. labor market," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Mar, pages 135-152.

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