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Does Fiscal Policy Matter? Blinder and Solow Revisited

  • Roger Farmer

    (University of California Los Angeles)

  • Dmitry Plotnikov

    (University Of California, Los Angeles)

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.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 73.

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Date of creation: 2012
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Handle: RePEc:red:sed012:73
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  1. Harrison, Sharon G & Weder, Mark, 2002. "Did Sunspot Forces Cause the Great Depression?," CEPR Discussion Papers 3267, C.E.P.R. Discussion Papers.
  2. Roger E.A. Farmer, 2010. "Animal Spirits, Persistent Unemployment and the Belief Function," NBER Working Papers 16522, National Bureau of Economic Research, Inc.
  3. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
  4. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, May.
  5. 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.
  6. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  7. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, May.
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