Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits

By Douglas Laxton, Dirk V Muir, Michael Kumhof, Susanna Mursula, Charles Freedman

November 1, 2009

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Format: Chicago

Douglas Laxton, Dirk V Muir, Michael Kumhof, Susanna Mursula, and Charles Freedman. Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits, (USA: International Monetary Fund, 2009) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper uses the IMF's Global Integrated Monetary and Fiscal Model to compute shortrun multipliers of fiscal stimulus measures and long-run crowding-out effects of higher debt. Multipliers of two-year stimulus range from 0.2 to 2.2 depending on the fiscal instrument, the extent of monetary accommodation and the presence of a financial accelerator mechanism. A permanent 0.5 percentage point increase in the U.S. deficit to GDP ratio raises the U.S. tax burden and world real interest rates in the long run, thereby reducing U.S. and rest of the world output by 0.3-0.6 and 0.2 percent, respectively.

Subject: Accommodative monetary policy, Consumption, Fiscal policy, Fiscal stimulus, Real interest rates

Keywords: Aggregate demand, External finance, Monetary policy, Real interest rate, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/255
Stock No:

WPIEA2009255
ISBN:

9781451874013
ISSN:

1018-5941

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