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Fiscal Stimulus with spending reversals

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  • Corsetti, Giancarlo
  • Meier, André
  • Müller, Gernot

Abstract

The impact of fiscal stimulus depends not only on short-term tax and spending policies, but also on expectations about offsetting measures in the future. This paper analyzes the effects of an increase in government spending under a plausible debt-stabilizing policy that systematically reduces spending below trend over time, in response to rising public liabilities. Accounting for such spending reversals brings an otherwise standard new Keynesian model in line with the stylized facts of fiscal transmission, including the crowding-in of consumption and the `puzzle' of real exchange rate depreciation. Time series evidence for the U.S. supports the empirical relevance of endogenous spending reversals.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7302.

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Date of creation: May 2009
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Handle: RePEc:cpr:ceprdp:7302

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Related research

Keywords: consumption; Fiscal policy transmission; monetary policy; real exchange rate; real interest rates; sticky prices;

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  1. Fabio Canova & Evi Pappa, 2007. "Price Differentials in Monetary Unions: The Role of Fiscal Shocks," Economic Journal, Royal Economic Society, vol. 117(520), pages 713-737, 04.
  2. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
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