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The theory of the fiscal stimulus: how will a debt-financed stimulus affect the future?


  • W. Max Corden


This paper takes a close look at the Keynesian theory underlying the policy of fiscal stimulus being undertaken or considered in many countries, led by the United States. A central question is whether a debt-financed fiscal stimulus now must adversely affect future taxpayers, owing to the debt burden being created. There are many interesting issues considered, for example, the role of automatic stabilizers, and the basis for Keynes's paradox of thrift. The model used is for a single country with a floating exchange rate. It is assumed that, for various reasons, monetary policy cannot eliminate high unemployment and a resultant output gap . In fact, there is a market failure, which government action needs to compensate for, at least temporarily. Copyright 2010, Oxford University Press.

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  • W. Max Corden, 2010. "The theory of the fiscal stimulus: how will a debt-financed stimulus affect the future?," Oxford Review of Economic Policy, Oxford University Press, vol. 26(1), pages 38-47, Spring.
  • Handle: RePEc:oup:oxford:v:26:y:2010:i:1:p:38-47

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    References listed on IDEAS

    1. Bruno Amable & Donatella Gatti, 2004. "Product market competition, job security, and aggregate employment," Oxford Economic Papers, Oxford University Press, vol. 56(4), pages 667-686, October.
    2. Amable, Bruno & Demmou, Lilas & Gatti, Donatella, 2007. "Employment Performance and Institutions: New Answers to an Old Question," IZA Discussion Papers 2731, Institute for the Study of Labor (IZA).
    3. Nickell, Stephen, 1999. "Product markets and labour markets1," Labour Economics, Elsevier, vol. 6(1), pages 1-20, March.
    4. Masahiko Aoki, 2013. "The Contingent Governance Of Teams: Analysis Of Institutional Complementarity," Chapters,in: Comparative Institutional Analysis, chapter 14, pages 230-249 Edward Elgar Publishing.
    5. Amable, Bruno & Gatti, Donatella, 2004. "The Political Economy of Job Protection and Income Redistribution," IZA Discussion Papers 1404, Institute for the Study of Labor (IZA).
    6. Dean Baker & Andrew Glyn & David Howell & John Schmitt, 2002. "Labor Market Institutions and Unemployment: A Critical Assessment of the Cross-Country Evidence," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2002-17, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    7. Richard Freeman, 2005. "Labour market institutions without blinders: The debate over flexibility and labour market performance," International Economic Journal, Taylor & Francis Journals, vol. 19(2), pages 129-145.
    8. Amable, Bruno & Gatti, Donatella, 2004. "Labour and Product Market Reforms: A Case for Policy Complementarity," IZA Discussion Papers 1190, Institute for the Study of Labor (IZA).
    9. Amable, Bruno, 2003. "The Diversity of Modern Capitalism," OUP Catalogue, Oxford University Press, number 9780199261147, June.
    10. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, number 9780198293323, June.
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    1. repec:wsi:serxxx:v:62:y:2017:i:02:n:s0217590816500041 is not listed on IDEAS
    2. Jha, Shikha & Mallick, Sushanta K. & Park, Donghyun & Quising, Pilipinas F., 2014. "Effectiveness of countercyclical fiscal policy: Evidence from developing Asia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 82-98.
    3. W. Corden, 2011. "Ambulance Economics: The Pros and Cons of Fiscal Stimuli," Open Economies Review, Springer, vol. 22(2), pages 235-245, April.

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