Fiscal Stimulus with Spending Reversals

Author/Editor:

Gernot Müller ; Giancarlo Corsetti ; Andre Meier

Publication Date:

May 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:

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. 2009/106

Subject:

Expenditure Fiscal policy Long term interest rates Real exchange rates Real interest rates

English

Publication Date:

May 1, 2009

ISBN/ISSN:

9781451872538/1018-5941

Stock No:

WPIEA2009106

Pages:

39

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