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Alternative Public Spending Rules and Output Volatility

  • Jean-Paul Lam

    (Bank of Canada)

  • William Scarth

    (McMaster University)

One of the central lessons learned from the Great Depression was that adjusting government spending each year to balance the budget increases the volatility of output. We compare this policy with one that involves running temporary deficits and surpluses and an average budget balance of zero. Our analysis allows monetary policy to adjust to a change in fiscal regime, and the specifications for aggregate demand and supply are consistent with the "new neoclassical synthesis." Our results give only limited support to the conventional wisdom on fiscal rules and stability of output.

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File URL: http://econwpa.repec.org/eps/mac/papers/0211/0211005.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0211005.

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Length: 22 pages
Date of creation: 12 Nov 2002
Date of revision:
Handle: RePEc:wpa:wuwpma:0211005
Note: Type of Document - PDF; prepared on UNIX Blade 100; to print on all; pages: 22; figures: none
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  2. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
  3. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  4. Christiano, Lawrence J., 1984. "A reexamination of the theory of automatic stabilizers," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 20(1), pages 147-206, January.
  5. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
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  8. Alan J. Auerbach & Daniel R. Feenberg, 2000. "The Significance of Federal Taxes as Automatic Stabilizers," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 37-56, Summer.
  9. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Finance and Economics Discussion Series 93-17, Board of Governors of the Federal Reserve System (U.S.).
  10. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  11. Smyth, David J, 1974. "Built-in Flexibility of Taxation and Stability in a Simple Dynamic IS-LM Model," Public Finance = Finances publiques, , vol. 29(1), pages 111-14.
  12. Jonathan Millar, 1997. "The Effects of Budget Rules on Fiscal Performance and Macroeconomic Stabilization," Working Papers 97-15, Bank of Canada.
  13. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  14. Darrel Cohen & Glenn Follette, 1999. "The automatic fiscal stabilizers: quietly doing their thing," Finance and Economics Discussion Series 1999-64, Board of Governors of the Federal Reserve System (U.S.).
  15. Alberto Alesina & Tamim Bayoumi, 1996. "The Costs and Benefits of Fiscal Rules: Evidence from U.S. States," NBER Working Papers 5614, National Bureau of Economic Research, Inc.
  16. Robert G. King, 2000. "The new IS-LM model : language, logic, and limits," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 45-103.
  17. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 716-46, November.
  18. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  19. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  20. Helliwell, John & Gorbet, Fred, 1971. "Assessing the Dynamic Efficiency of Automatic Stabilizers," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 826-45, July-Aug..
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