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Fiscal Stimulus with Spending Reversals

Author

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  • 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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    References listed on IDEAS

    as
    1. Fabio Canova & Evi Pappa, 2007. "Price Differentials in Monetary Unions: The Role of Fiscal Shocks," Economic Journal, Royal Economic Society, vol. 117(520), pages 713-737, April.
    2. F. Lobo & M. Caba-as Sáenz & R. González Pérez, 2005. "Review of economic studies of the pharmaceutical industry published over the last 20 years by Spanish economists," Chapters, in: Jaume Puig-Junoy (ed.), The Public Financing of Pharmaceuticals, chapter 11, Edward Elgar Publishing.
    3. 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, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
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    More about this item

    Keywords

    WP; interest rate;

    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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