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The Limits to Fiscal Stimulus

  • Buiter, Willem H.

The paper considers the case for an internationally coordinated further fiscal stimulus during the second half of 2009. Although this makes some of the analysis period-specific, most of the issues and principles considered are timeless. For a fiscal stimulus to be both effective there must be idle resources due to a failure of effective demand. For it to be desirable, there must be no alternative policy instruments (including monetary policy) for boosting demand. There must be no complete financial crowding out and no complete direct crowding out, through Ricardian equivalence/debt neutrality, through Minsky equivalence or through a high degree of substitutability between private and public exhaustive expenditure in private preferences or production possibilities. Finally, for international coordination to be desirable, there must be cross-border externalities from national fiscal stimuli. The paper considers each of these conditions in turn.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7607.

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Date of creation: Dec 2009
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Handle: RePEc:cpr:ceprdp:7607
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  1. Mountford, A.W. & Uhlig, H.F.H.V.S., 2002. "What are the Effects of Fiscal Policy Shocks?," Discussion Paper 2002-31, Tilburg University, Center for Economic Research.
  2. Antonio Spilimbergo & Steve Symansky & Olivier Blanchard & Carlo Cottarelli, 2009. "Fiscal Policy For The Crisis," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 10(2), pages 26-32, 07.
  3. Carlo Favero & Francesco Giavazzi, 2009. "How large are the effects of tax changes?," NBER Working Papers 15303, National Bureau of Economic Research, Inc.
  4. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  5. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," NBER Working Papers 16479, National Bureau of Economic Research, Inc.
  6. Willem Buiter, 2009. "Negative Nominal Interest Rates: Three ways to overcome the zero lower bound," FMG Discussion Papers dp636, Financial Markets Group.
  7. Reinhart, Carmen, 2009. "The Second Great Contraction," MPRA Paper 21485, University Library of Munich, Germany.
  8. Roberto Perotti, 2007. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Working Papers 13143, National Bureau of Economic Research, Inc.
  9. Blinder, Alan S, 1987. "Credit Rationing and Effective Supply Failures," Economic Journal, Royal Economic Society, vol. 97(386), pages 327-52, June.
  10. John Cogan & Tobias Cwik & John Taylor & Volker Wieland, 2009. "New Keynesian Versus Old Keynesian Government Spending Multipliers," Discussion Papers 08-030, Stanford Institute for Economic Policy Research.
  11. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
  12. Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  13. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
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