The unintended consequences of the debt: Will increased government expenditure hurt the economy?
In 2008, governments in many countries embarked on large fiscal expenditure programmes, with the intention to support the economy and prevent a more serious recession. In this study, the overall impact of a substantial increase in fiscal expenditure is considered by providing a novel analysis of the most relevant recent experience in similar circumstances, namely that of Japan in the 1990s. Then a weak economy with risk-averse banks seemed to require some of the largest peacetime fiscal stimulation programmes on record, albeit with disappointing results. The explanations provided by the literature and their unsatisfactory empirical record are reviewed. An alternative explanation, derived from early Keynesian models on the ineffectiveness of fiscal policy is presented in the form of a modified Fisher-equation, which incorporates the recent findings in the credit view literature. The model postulates complete quantity crowding out. It is subjected to empirical tests, which were supportive. Thus evidence is found that fiscal policy, if not supported by suitable monetary policy, is likely to crowd out private sector demand, even in an environment of falling or near-zero interest rates. As a policy conclusion it is pointed out that by changing the funding strategy, complete crowding out can be avoided and a positive net effect produced. The proposed framework creates common ground between proponents of Keynesian views (as held, among others, by Blinder and Solow), monetarist views (as held in particular by Milton Friedman) and those of leading contemporary macroeconomists (such as Mankiw).
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
Web page: http://www.ifk-cfs.de/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John A. Tatom, 1985. "Two views of the effects of government budget deficits in the 1980s," Review, Federal Reserve Bank of St. Louis, issue Oct, pages 5-16.
- James M. Boughton, 1991. "Long-Run Money Demand in Large Industrial Countries," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 1-32, March.
- Ben S. Bernanke & Mark Gertler, 1995.
"Inside the Black Box: The Credit Channel of Monetary Policy Transmission,"
NBER Working Papers
5146, National Bureau of Economic Research, Inc.
- Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
- Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Ludvigson, Sydney, 1996. "The macroeconomic effects of government debt in a stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 25-45, August.
- Milton Friedman, 1971.
"A Theoretical Framework for Monetary Analysis,"
National Bureau of Economic Research, Inc, number frie71-1, December.
- Gertler, Mark & Gilchrist, Simon, 1993.
" The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 95(1), pages 43-64.
- Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
- Asako, Kazumi & Ito, Takatoshi & Sakamoto, Kazunori, 1991. "The rise and fall of deficit in Japan, 1965-1990," Journal of the Japanese and International Economies, Elsevier, vol. 5(4), pages 451-472, December.
- Barro, Robert J, 1974.
"Are Government Bonds Net Wealth?,"
Journal of Political Economy,
University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
- Barry, Frank & Devereux, Michael B., 2003. "Expansionary fiscal contraction: A theoretical exploration," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 1-23, March.
- Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
- Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
- Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
When requesting a correction, please mention this item's handle: RePEc:zbw:cfswop:201126. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.