Is Fiscal Stimulus a Good Idea?
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.
|Date of creation:||May 2012|
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References listed on IDEAS
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- Fair, Ray C., 2012. "Has macro progressed?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 2-10.
- Robert J. Barro & Charles J. Redlick, 2011.
"Macroeconomic Effects From Government Purchases and Taxes,"
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Oxford University Press, vol. 126(1), pages 51-102.
- Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
- Robert Barro, 2011. "Macroeconomic Effects from Government Purchases and Taxes," Annual Meeting Plenary 2011-1, Society for Economic Dynamics.
- Alan J. Auerbach & Yuriy Gorodnichenko, 2010.
"Measuring the Output Responses to Fiscal Policy,"
NBER Working Papers
16311, National Bureau of Economic Research, Inc.
- 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.
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