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Fiscal Stimulus with Spending Reversals

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  • Gernot Müller
  • Giancarlo Corsetti
  • André Meier

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 links current stimulus to a subsequent period of spending restraint. 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 spending reversals.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/106.

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Length: 39
Date of creation: 01 May 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/106

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Keywords: Real interest rates; Data analysis; Economic models; Fiscal stability; Government expenditures; Public debt; Real effective exchange rates; government spending; fiscal policy; government spending shocks; private consumption; real interest rate; aggregate demand; fiscal shocks; fiscal stimulus; tax burden; spending cuts; public spending; fiscal expansions; fiscal expansion; tax increases; consumption expenditure; consumption over time; fiscal measures; disposable income; budget constraint; fiscal authorities; consumption demand; fiscal stabilization; government budget; fiscal policies; expenditure cuts; consumption decisions; government purchases; budget balance; fiscal adjustment; consumption good; fiscal policy rules; increase in consumption; tax changes; fiscal contractions; taxation; fiscal crisis; fiscal outlook; public debt reverse; fiscal corrections; consumption increases; current disposable income; fiscal constraints; domestic production; defense spending; public expenditure; national income; fiscal austerity; aggregate consumption; budget deficits; government budget balance; fiscal events; personal consumption; fiscal impulse; response of consumption; fiscal restraint; consumption time; consumption price index; current income; fiscal restrictions; general equilibrium; consumption price; fiscal rules; government expenditure; tax cuts; consumption goods;

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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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