Does Fiscal Policy Matter? Blinder and Solow Revisited
This paper uses the old-Keynesian representative agent model developed in previous work by Farmer (2010) to answer two questions: 1) do increased government purchases crowd out private consumption? 2) do increased government purchases reduce unemployment? Farmer compared permanent tax financed expenditure paths and showed that the answer to 1) was yes and the answer to 2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in previous work by Farmer. However, in contrast to Farmer's experiment we find that a temporary increase in government purchases can also reduce unemployment.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
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- Farmer, Roger E A, 2010.
"Animal Spirits, Persistent Unemployment and the Belief Function,"
CEPR Discussion Papers
8100, C.E.P.R. Discussion Papers.
- Roger E.A. Farmer, 2010. "Animal Spirits, Persistent Unemployment and the Belief Function," NBER Working Papers 16522, National Bureau of Economic Research, Inc.
- Roger E. A. Farmer, 2008.
"Aggregate demand and supply,"
International Journal of Economic Theory,
The International Society for Economic Theory, vol. 4(1), pages 77-93.
- Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
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