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Fiscal stimulus: An overlapping generations analysis

  • Ross Guest
  • Anthony J Makin

Motivated by the revival of Keynesian-inspired fiscal activism in response to the global financial crisis of 2008-09, this paper analyses stylised simulations of fiscal stimulus using an overlapping generations model that allows for feedback effects of stimulus spending on intertemporal consumption decisions of households, via the tax rate, wages and the interest rate. Simulations vary according to the size and type of stimulus, and the speed and way in which the stimulus is unwound. The main qualitative result is that the short run output gains from fiscal stimulus are transitory - the fiscal multiplier turns negative and remains negative long after the stimulus ends, mainly because it must be reversed in some way. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented.

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File URL: https://www120.secure.griffith.edu.au/research/items/d7f8d2ac-5e46-415c-83c1-6ba04950343f/1/2011-02-fiscal-stimulus-an-overlapping-generations-analysis.pdf
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Paper provided by Griffith University, Department of Accounting, Finance and Economics in its series Discussion Papers in Economics with number economics:201102.

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Date of creation: Feb 2011
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Handle: RePEc:gri:epaper:economics:201102
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  1. Andrew Mountford & Harald Uhlig, 2005. "What are the Effects of Fiscal Policy Shocks?," SFB 649 Discussion Papers SFB649DP2005-039, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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  7. Lorenzo Forni & Libero Monteforte & Luca Sessa, 2007. "The general equilibrium effects of fiscal policy: estimates for the euro area," Temi di discussione (Economic working papers) 652, Bank of Italy, Economic Research and International Relations Area.
  8. Holtz-Eakin, Douglas, 1994. "Public-Sector Capital and the Productivity Puzzle," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 12-21, February.
  9. Sven Jari Stehn & Daniel Leigh, 2009. "Fiscal and Monetary Policy During Downturns; Evidence From the G7," IMF Working Papers 09/50, International Monetary Fund.
  10. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  11. William Coleman, 2010. "When Expansionary Fiscal Policy is Contractionary: A Neoklassikal Scenario," The Economic Record, The Economic Society of Australia, vol. 86(s1), pages 61-68, 09.
  12. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
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