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Fiscal Stimulus with Spending Reversals

Author

Listed:
  • Gernot Müller
  • Giancarlo Corsetti
  • Mr. Andre Meier

Abstract

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.

Suggested Citation

  • Gernot Müller & Giancarlo Corsetti & Mr. Andre Meier, 2009. "Fiscal Stimulus with Spending Reversals," IMF Working Papers 2009/106, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2009/106
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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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