DOES FISCAL POLICY MATTER? BLINDER AND SOLOW REVISITED

Roger Farmer and Dmitry Plotnikov

Macroeconomic Dynamics, 2012, vol. 16, issue S1, 149-166

Abstract: This paper uses the old Keynesian representative agent model developed by Roger E. A. Farmer [Expectations, Employment and Prices. New York: Oxford University Press (2010)] to answer two questions: (1) Do increased government purchases crowd out private consumption? (2) Do increased government purchases reduce unemployment? Farmer compared permanent tax-financed expenditure paths and showed that the answer to (1) was yes and the answer to (2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer. However, in contrast to Farmer's experiment, we find that a temporary increase in government purchases can also reduce unemployment.

Date: 2012
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Working Paper: Does Fiscal Policy Matter? Blinder and Solow Revisited (2012)
Working Paper: Does Fiscal Policy Matter? Blinder and Solow Revisited (2011)
Working Paper: Does Fiscal Policy Matter? Blinder and Solow Revisited (2010)
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