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