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Fiscal stimulus: an overlapping generations analysis

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  • Ross Guest
  • Anthony J Makin

Abstract

Motivated by the revival of Keynesian-inspired fiscal activism in response to the global financial crisis of 2008-09, this paper analyses stylised simulations of fiscal stimulus using an overlapping generations model that allows for feedback effects of stimulus spending on intertemporal consumption decisions of households, via the tax rate, wages and the interest rate. Simulations vary according to the size and type of stimulus, and the speed and way in which the stimulus is unwound. The main qualitative result is that the short run output gains from fiscal stimulus are transitory - the fiscal multiplier turns negative and remains negative long after the stimulus ends, mainly because it must be reversed in some way. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented.

Suggested Citation

  • Ross Guest & Anthony J Makin, 2012. "Fiscal stimulus: an overlapping generations analysis," Economic Issues Journal Articles, Economic Issues, vol. 17(2), pages 1-25, September.
    • Handle: RePEc:eis:articl:212guest
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    2. Ross Guest & Anthony J. Makin, 2011. "In the Long Run, the Multiplier is Dead: Lessons from a Simulation," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 18(1), pages 13-22.

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    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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