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Is Fiscal Stimulus a Good Idea"

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Abstract

The results in this paper, using a structural multi-country macroeconometric model, suggest that there is at most a small gain from fiscal stimulus in the form of increased transfer payments or increased tax deductions if the increased debt generated must eventually be paid back. The gain in output and employment on the way up is roughly offset by the loss in output and employment on the way down as the debt from the initial stimulus is paid off. This conclusion is robust to different assumptions about monetary policy. To the extent that there is a gain, the longer one waits to begin paying the debt back the better. Possible caveats regarding the model used are that 1) monetary policy is not powerful enough to keep the economy at full employment, 2) potential output is taken to be exogenous, 3) possible permanent effects on asset prices and animal spirits from a stimulus are not taken into account, and 4) the model does not have the feature that in really bad times the economy might collapse without a stimulus.

Suggested Citation

  • Ray C. Fair, 2012. "Is Fiscal Stimulus a Good Idea"," Cowles Foundation Discussion Papers 1861, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1861
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d18/d1861.pdf
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    References listed on IDEAS

    as
    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    2. J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 233-297.
    3. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
    4. Fair, Ray C., 2012. "Has macro progressed?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 2-10.
    5. J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 233-297.
    6. Robert J. Barro & Charles J. Redlick, 2011. "Macroeconomic Effects From Government Purchases and Taxes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 51-102.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. ¿Son los estímulos fiscales una buena idea?
      by in Tiempo Económico on 2012-05-20 04:08:51

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    More about this item

    Keywords

    Fiscal stimulus; Multipliers;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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