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Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits

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Author Info

  • Douglas Laxton
  • Dirk Muir
  • Michael Kumhof
  • Susanna Mursula
  • Charles Freedman

Abstract

This paper uses the IMF''s Global Integrated Monetary and Fiscal Model to compute shortrun multipliers of fiscal stimulus measures and long-run crowding-out effects of higher debt. Multipliers of two-year stimulus range from 0.2 to 2.2 depending on the fiscal instrument, the extent of monetary accommodation and the presence of a financial accelerator mechanism. A permanent 0.5 percentage point increase in the U.S. deficit to GDP ratio raises the U.S. tax burden and world real interest rates in the long run, thereby reducing U.S. and rest of the world output by 0.3-0.6 and 0.2 percent, respectively.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/255.

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Length: 40
Date of creation: 01 Nov 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/255

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Keywords: Financial crisis; Budget deficits; Economic models; External shocks; Financial sector; Global Financial Crisis 2008-2009; Government expenditures; Productivity; Public debt; fiscal stimulus; inflation; fiscal policy; monetary policy; real interest rates; real interest rate; aggregate demand; nominal interest rates; fiscal multipliers; budget constraint; fiscal deficits; tax rates; government deficit; fiscal actions; fiscal action; price level; tax burden; increase in consumption; tax cuts; fiscal policies; real value; fiscal instrument; monetary economics; taxes on labor; taxation; nominal interest rate; fiscal multiplier; fiscal instruments; government spending; fiscal rule; fiscal accounts; real disposable incomes; tax income; fiscal measures; increase in inflation; fiscal model; discretionary fiscal policy; government budget; inflation target; account deficits; tax changes; fiscal policy actions; fiscal policy rules; medium-term fiscal framework; budget surplus; relative price; fiscal policy on consumption; fiscal issues; real output; foreign exchange; fiscal shock; real exchange rates; public finance; tax revenue; fiscal stance; expansionary fiscal; government budget constraint; fiscal stimulus package; fiscal policy rule; fiscal shocks; inflation rate; inflationary pressures; foreign currency; tax payments; budget balances; inflation targeting; nominal rate of return; fiscal framework;

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Cited by:
  1. Yongheng Deng & Randall Morck & Jing Wu & Bernard Yeung, 2011. "Monetary and Fiscal Stimuli, Ownership Structure, and China's Housing Market," NBER Working Papers 16871, National Bureau of Economic Research, Inc.
  2. Bennett T. McCallum, 2011. "Should Central Banks Raise their Inflation Targets? Some Relevant Issues," NBER Working Papers 17005, National Bureau of Economic Research, Inc.
  3. Gerhard Reitschuler & Rupert Sendlhofer, 2011. "Fiscal policy, trigger points and interest rates: Additional evidence from the U.S," Working Papers, Faculty of Economics and Statistics, University of Innsbruck 2011-23, Faculty of Economics and Statistics, University of Innsbruck.
  4. Thomas Laubach, 2010. "Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER International Seminar on Macroeconomics 2010, pages 7-29 National Bureau of Economic Research, Inc.
  5. Aliya Algozhina, 2012. "Monetary and Fiscal Policy Interactions in an Emerging Open Economy: a Non-Ricardian DSGE Approach," FIW Working Paper series, FIW 094, FIW, revised Dec 2012.
  6. Stähler, Nikolai & Thomas, Carlos, 2012. "FiMod — A DSGE model for fiscal policy simulations," Economic Modelling, Elsevier, Elsevier, vol. 29(2), pages 239-261.
  7. Koch, Daniel, 2011. "Wirksame Begrenzung von Staatsverschuldung auf europäischer Ebene," Wirtschaftswissenschaftliche Beiträge 114, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
  8. Ricardo Félix & Gabriela Castro & José Maria & Paulo Júlio, 2013. "Fiscal Multipliers in a Small Euro Area Economy: How Big Can They Get in Crisis Times?," EcoMod2013 5307, EcoMod.

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