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Positive effects of fiscal expansions on growth and debt

  • Canale, Rosaria Rita

The aim of this paper is to point out the shortcomings of propositions that deny economic policy any active role and propose a simple model by which public expenditure is still recognised as performing an active and positive function. The core of our thesis is that public deficit, because it actually has positive effects on the rate of growth, does not automatically increase public debt but rather reduces it. These positive effects are greater if the Central Bank’s monetary policy rule does not change. The policy authority has no reason to change its behaviour since there is no strict relation between fiscal expansions and inflation. The smaller the economic weight of the country considered in terms of the whole Monetary Union, the weaker is the link. These conclusions suggest we should rethink the limits imposed by the Stability and Growth Pact to the action of governments and subordinate the possibility of spending to the inflationary effects of deficit on the whole Union.

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File URL: http://mpra.ub.uni-muenchen.de/1432/1/MPRA_paper_1432.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1432.

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Date of creation: Apr 2006
Date of revision: Nov 2006
Handle: RePEc:pra:mprapa:1432
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  14. Wyplosz, Charles (ed.), 2001. "The Impact of EMU on Europe and the Developing Countries," OUP Catalogue, Oxford University Press, number 9780199245314, March.
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  16. L. R. Wray, 1990. "Money and Credit in Capitalist Economies," Books, Edward Elgar, number 474, July.
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  19. Bofinger, Peter & Mayer, Eric & Wollmershäuser, Timo & Hülsewig, Oliver, 2003. "The BMW model: A new framework for teaching monetary macroeconomics in closed and open economies," W.E.P. - Würzburg Economic Papers 34, University of Würzburg, Chair for Monetary Policy and International Economics.
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