Fiscal Stimulus with Spending Reversals
The impact of fiscal stimulus depends not only on short-term tax and spending policies, but also on expectations about offsetting measures in the future. This paper analyzes the effects of an increase in government spending under a plausible debt-stabilizing policy that links current stimulus to a subsequent period of spending restraint. Accounting for such spending reversals brings an otherwise standard new Keynesian model in line with the stylized facts of fiscal transmission, including the crowding-in of consumption and the 'puzzle' of real exchange rate depreciation. Time series evidence for the U.S. supports the empirical relevance of spending reversals.
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- Fabio Canova & Evi Pappa, 2003.
"Price differentials in monetary unions: The role of fiscal shocks,"
Economics Working Papers
923, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2005.
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- Olivier Blanchard & Roberto Perotti, 1999.
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NBER Working Papers
7269, National Bureau of Economic Research, Inc.
- Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
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