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The Limits to Fiscal Stimulus

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  • Buiter, Willem H.

Abstract

The paper considers the case for an internationally coordinated further fiscal stimulus during the second half of 2009. Although this makes some of the analysis period-specific, most of the issues and principles considered are timeless. For a fiscal stimulus to be both effective there must be idle resources due to a failure of effective demand. For it to be desirable, there must be no alternative policy instruments (including monetary policy) for boosting demand. There must be no complete financial crowding out and no complete direct crowding out, through Ricardian equivalence/debt neutrality, through Minsky equivalence or through a high degree of substitutability between private and public exhaustive expenditure in private preferences or production possibilities. Finally, for international coordination to be desirable, there must be cross-border externalities from national fiscal stimuli. The paper considers each of these conditions in turn.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7607.

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Date of creation: Dec 2009
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Handle: RePEc:cpr:ceprdp:7607

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Related research

Keywords: Crowding out; Debt sustainability; Fiscal Policy; Minsky neutrality; Ricardian equivalence;

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References

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  1. John F. Cogan & Tobias Cwik & John B. Taylor & Volker Wieland, 2009. "New Keynesian versus Old Keynesian Government Spending Multipliers," NBER Working Papers 14782, National Bureau of Economic Research, Inc.
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  6. Willem H. Buiter, 2009. "Negative Nominal Interest Rates: Three ways to overcome the zero lower bound," NBER Working Papers 15118, National Bureau of Economic Research, Inc.
  7. Christopher D Carroll, 1990. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," Economics Working Paper Archive 371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
  8. Roberto Perotti, 2008. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 169-226 National Bureau of Economic Research, Inc.
  9. Alan S. Blinder, 1985. "Credit Rationing and Effective Supply Failures," NBER Working Papers 1619, National Bureau of Economic Research, Inc.
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  12. Roberto Perotti, 2005. "Estimating the effects of fiscal policy in OECD countries," Proceedings, Federal Reserve Bank of San Francisco.
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Cited by:
  1. Lejour, Arjan & Lukkezen, Jasper & Veenendaal, Paul, 2010. "Sustainability of Government Debt in the EU," MPRA Paper 30139, University Library of Munich, Germany, revised 07 Jun 2010.
  2. Salvatore Dell'Erba & Sergio Sola, 2013. "Fiscal Policy, Interest Rates and Risk Premia in Open Economy," IHEID Working Papers 05-2013, Economics Section, The Graduate Institute of International Studies.
  3. Salvatore Dell'Erba & Sergio Sola, 2013. "Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel," IMF Working Papers 13/159, International Monetary Fund.
  4. Bagliano, Fabio C. & Morana, Claudio, 2012. "The Great Recession: US dynamics and spillovers to the world economy," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 1-13.
  5. Marek Dabrowski, 2009. "The Global Financial Crisis: Lessons for European Integration," CASE Network Studies and Analyses 0384, CASE-Center for Social and Economic Research.
  6. Gebhard Kirchgässner, 2010. "Möglichkeiten der Konjunktursteuerung: Grundsätzliche Überlegungen für die Schweiz," University of St. Gallen Department of Economics working paper series 2010 2010-13, Department of Economics, University of St. Gallen.
  7. Sergio Sola, 2013. "Temporary and Persistent Fiscal Policy Shocks," IHEID Working Papers 06-2013, Economics Section, The Graduate Institute of International Studies.
  8. Jha, Shikha & Mallick, Sushanta K. & Park, Donghyun & Quising, Pilipinas F., 2014. "Effectiveness of countercyclical fiscal policy: Evidence from developing Asia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 82-98.

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