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Fiscal multipliers in war and in peace

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  • David Andolfatto

Abstract

Proponents of fiscal stimulus argue that government spending is needed to replace the private spending normally lost during a recession. Estimates of the so-called fiscal multiplier based on wartime episodes are used to support the proposition that a peacetime intervention can "stimulate" the economy in a desirable manner. The author argues that a wartime crisis is fundamentally different from a peacetime economic crisis. What may be desirable in war is not necessarily so in peace. This is demonstrated formally in the context of a simple neoclassical model, which delivers fiscal multipliers consistent with the wartime evidence. The optimal fiscal policy, whether it entails expansion or contraction, is independent of the size of the fiscal multiplier.

Suggested Citation

  • David Andolfatto, 2010. "Fiscal multipliers in war and in peace," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 121-128.
  • Handle: RePEc:fip:fedlrv:y:2010:i:mar:p:121-128:n:v.92no.2
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    References listed on IDEAS

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    1. Thomas A. Garrett & Andrew F. Kozak & Russell M. Rhine, 2010. "Institutions and government growth: a comparison of the 1890s and the 1930s," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 109-120.
    2. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
    3. Alan J. Auerbach & William G. Gale, 2009. "Activist fiscal policy to stabilize economic activity," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 327-374.
    4. Monacelli, Tommaso & Perotti, Roberto & Trigari, Antonella, 2010. "Unemployment fiscal multipliers," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 531-553, July.
    5. Alan Bollard, 2009. "General discussion: activist fiscal policy to stabilize economic activity," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 399-411.
    6. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
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    Cited by:

    1. David Andolfatto & Marcela M. Williams, 2012. "Many moving parts: the latest look inside the U.S. labor market," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 135-152.

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    Keywords

    Fiscal policy - United States;

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