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The dark side of fiscal stimulus

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  • Strulik, Holger
  • Trimborn, Timo

Abstract

Most of the discussion about fiscal stimulus focuses on the multiplier of government spending on impact. In this paper we shift the focus to the multiplier at the end, i.e. to the period in which a deficit spending program terminates. We show that recent time series analyses as well as economic models of different schools of thought predict that the multiplier turns negative before spending expires. This means that aggregate output at the time of expiry of fiscal stimulus is predicted to be lower than it could be without deficit spending. We set up a simple model that explains this phenomenon. Using phase diagram analysis we prove that the aggregate capital stock at the time of expiry of fiscal stimulus is lower than it would be without the deficit spending program. This fact explains why aggregate output is below its laissez faire level as well. We then calibrate an extended version of the model for the US and demonstrate how fiscal stimulus slows down recovery from a recession in the medium-run. --

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Bibliographic Info

Paper provided by University of Goettingen, Department of Economics in its series Center for European, Governance and Economic Development Research Discussion Papers with number 150.

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Date of creation: 2013
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Handle: RePEc:zbw:cegedp:150

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Web page: http://www.cege.wiso.uni-goettingen.de/
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Keywords: fiscal stimulus; government spending; output multiplier; economic recovery;

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Cited by:
  1. Landais, Bernard, 2011. "Conduite et efficacité de la politique économique : les leçons de la crise
    [Management and Efficiency of the Economic Policies : The Crisis' Lessons"]
    ," MPRA Paper 31223, University Library of Munich, Germany.
  2. Trimborn, Timo & Strulik, Holger, 2011. "The Dark Side of Fiscal Stimulus," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48725, Verein für Socialpolitik / German Economic Association.

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