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Alternative Public Spending Rules and Output Volatility

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Jean-Paul Lam
William Scarth

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File URL: http://www.bankofcanada.ca/en/res/wp/2002/wp02-37.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 02-37.

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Length: 24 pages Abstract: One of the central lessons learned from the Great Depression was that adjusting government spending each year to balance the budget increases the volatility of output. We compare this policy with one that involves running temporary deficits and surpluses and an average budget balance of zero. Our analysis allows monetary policy to adjust to a change in fiscal regime, and the specifications for aggregate demand and supply are consistent with the "new neoclassical synthesis." Our results give only limited support to the conventional wisdom on fiscal rules and stability of output.
Date of creation: 2002
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Handle: RePEc:bca:bocawp:02-37

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Keywords: Economic models; Fiscal policy; Transmission of monetary policy;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  2. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  3. Christiano, Lawrence J., 1984. "A reexamination of the theory of automatic stabilizers," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 20(1), pages 147-206, January. [Downloadable!] (restricted)
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  5. Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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    Other versions:
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  12. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
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  13. Jonathan Millar, 1997. "The Effects of Budget Rules on Fiscal Performance and Macroeconomic Stabilization," Working Papers 97-15, Bank of Canada. [Downloadable!]
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  15. Helliwell, John & Gorbet, Fred, 1971. "Assessing the Dynamic Efficiency of Automatic Stabilizers," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 826-45, July-Aug.. [Downloadable!] (restricted)
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    Other versions:
  17. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 716-46, November. [Downloadable!] (restricted)
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