Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits
IMF Working Papers, November 1, 2009
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- Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits
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Bibliographic details
- Authors: Douglas Laxton, Dirk V Muir, Michael Kumhof, Susanna Mursula, Charles Freedman
- Published: November 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451874013.001
Summary
- This paper uses the IMF's Global Integrated Monetary and Fiscal Model to compute short-run 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.
Short-run findings: fiscal multipliers
- Two-year fiscal stimulus multipliers: range from 0.2 to 2.2.
- Determinants of multiplier size:
- Type of fiscal instrument.
- Extent of monetary accommodation.
- Presence of a financial accelerator mechanism.
Long-run findings: debt, taxes, and global interest rates
- A permanent 0.5 percentage point increase in the U.S. deficit to GDP ratio leads to:
- An increase in the U.S. tax burden (magnitude not separately quantified in the summary).
- Higher world real interest rates (magnitude not separately quantified in the summary).
- Reductions in output:
- U.S. output reduced by 0.3-0.6 percent.
- Rest of the world output reduced by 0.2 percent.
Policy implications (implied by findings)
- Short-run fiscal stimulus can have substantially different impacts depending on instrument choice, monetary policy stance, and financial sector amplification.
- Permanent increases in deficits can raise long-run borrowing costs and tax burdens, with measurable negative effects on domestic and global output.
Source: IMF Working Paper "Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits", Douglas Laxton, Dirk V Muir, Michael Kumhof, Susanna Mursula, Charles Freedman, November 1, 2009.
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- 1. Overlapping Generations