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

Author/Editor:

Douglas Laxton ; Dirk V Muir ; Michael Kumhof ; Susanna Mursula ; Charles Freedman

Publication Date:

November 1, 2009

Electronic Access:

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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:

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.

Series:

Working Paper No. 2009/255

Subject:

Accommodative monetary policy Consumption Fiscal policy Fiscal stimulus Real interest rates

English

Publication Date:

November 1, 2009

ISBN/ISSN:

9781451874013/1018-5941

Stock No:

WPIEA2009255

Pages:

40

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