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Fiscal Stimulus with Spending Reversals

Author/Editor: Corsetti, Giancarlo | Meier, André | Müller, Gernot
Authorized for Distribution: May 1, 2009
Electronic Access: Free Full Text (PDF file size is 980KB)
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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: The impact of fiscal stimulus depends not only on short-term tax and spending policies, but also on expectations about offsetting measures in the future. This paper analyzes the effects of an increase in government spending under a plausible debt-stabilizing policy that links current stimulus to a subsequent period of spending restraint. Accounting for such spending reversals brings an otherwise standard new Keynesian model in line with the stylized facts of fiscal transmission, including the crowding-in of consumption and the 'puzzle' of real exchange rate depreciation. Time series evidence for the U.S. supports the empirical relevance of spending reversals.
 
Series: Working Paper No. 09/106
Subject(s): Consumption | Data analysis | Economic models | Fiscal policy | Fiscal stability | Government expenditures | Public debt | Real effective exchange rates | Real interest rates | Time series
Author's keyword(s): Fiscal policy | consumption | real exchange rate | real interest rates | sticky prices
 
English  
    Published:   May 1, 2009        
            Format:   Paper
    Stock No:   WPIEA2009106   Pages:   39
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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