Does an active fiscal policy work under a high level of government debt?

Jun-Hyung Ko

Applied Economics Letters, 2015, vol. 22, issue 13, 1083-1088

Abstract: This article theoretically investigates the effect of expansionary fiscal shocks when the government faces a high debt-to-GDP ratio, under the regime of an active fiscal policy with a passive monetary policy in the terminology of Leeper (1991). We find that expansionary fiscal shocks become less effective when the government faces a high level of debt because the wealth effect on households decreases.

Date: 2015
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DOI: 10.1080/13504851.2014.1002883

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