Fiscal Stimulus with spending reversals

Giancarlo Corsetti (), André Meier and Gernot J. Müller

No 7302, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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 systematically reduces spending below trend over time, in response to rising public liabilities. 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 endogenous spending reversals.

Keywords: consumption; Fiscal policy transmission; monetary policy; real exchange rate; real interest rates; sticky prices (search for similar items in EconPapers)
JEL-codes: E62 E63 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2009-05
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