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Does Fiscal Policy Matter? Blinder and Solow Revisited

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  • Roger E.A. Farmer
  • Dmitry Plotnikov

Abstract

This paper uses the old-Keynesian representative agent model developed in Farmer (2010b) to answer two questions: 1) do increased government purchases crowd out private consumption? 2) do increased government purchases reduce unemployment? Farmer compared permanent tax financed expenditure paths and showed that the answer to 1) was yes and the answer to 2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer (2010b). However, in contrast to Farmer's experiment we find that a temporary increase in government purchases can also reduce unemployment.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16644.

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Date of creation: Dec 2010
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Handle: RePEc:nbr:nberwo:16644

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  1. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
  2. Roger E. A. Farmer, 2007. "Aggregate Demand and Supply," NBER Working Papers 13406, National Bureau of Economic Research, Inc.
  3. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, October.
  4. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, October.
  5. Harrison, Sharon G & Weder, Mark, 2002. "Did Sunspot Forces Cause the Great Depression?," CEPR Discussion Papers 3267, C.E.P.R. Discussion Papers.
  6. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
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Cited by:
  1. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, 03.
  2. Farmer, Roger E A, 2011. "The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence," CEPR Discussion Papers 8617, C.E.P.R. Discussion Papers.
  3. Roger Farmer, 2011. "Animal Spirits, Financial Crises and Persistent Unemployment," NBER Working Papers 17137, National Bureau of Economic Research, Inc.
  4. Viktar Fedaseyeu & Vitaliy Strohush, 2012. "Loans from the Government, Overinvestment by Households, and Asset Bubbles," Working Papers 443, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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