Is Fiscal Stimulus a Good Idea?
AbstractThe results in this paper, using a structural multi-country macroeconometric model, suggest that there is at most a small gain from fiscal stimulus in the form of increased transfer payments or increased tax deductions if the increased debt generated must eventually be paid back. The gain in output and employment on the way up is roughly offset by the loss in output and employment on the way down as the debt from the initial stimulus is paid off. This conclusion is robust to different assumptions about monetary policy. To the extent that there is a gain, the longer one waits to begin paying the debt back the better. Possible caveats regarding the model used are that 1) monetary policy is not powerful enough to keep the economy at full employment, 2) potential output is taken to be exogenous, 3) possible permanent effects on asset prices and animal spirits from a stimulus are not taken into account, and 4) the model does not have the feature that in really bad times the economy might collapse without a stimulus.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1861.
Length: 20 pages
Date of creation: May 2012
Date of revision:
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Find related papers by JEL classification:
- E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fair, Ray C., 2012. "Has macro progressed?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 2-10.
- J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 233-297.
- Alan J. Auerbach & Yuriy Gorodnichenko, 2010.
"Measuring the Output Responses to Fiscal Policy,"
NBER Working Papers
16311, National Bureau of Economic Research, Inc.
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