Fiscal Stimulus with Spending Reversals

Giancarlo Corsetti, Andre Meier and Gernot Müller

The Review of Economics and Statistics, 2012, vol. 94, issue 4, 878-895

Abstract: The short-run effects of fiscal policy depend not only on current tax and spending choices, but also on expectations about future policy adjustment. While general equilibrium models typically restrict medium-term adjustment to taxation, we highlight the importance of government spending dynamics. First, we provide time series evidence for the United States suggesting that an exogenous increase in government spending prompts a rise in public debt, followed over time by a reduction in spending below trend. Second, we show how expected spending reversals alter the short-run impact of fiscal policy in a new Keynesian model, bringing it closer in line with the evidence. © 2012 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Keywords: fiscal policy transmission; consumption; real exchange rate; real interest rate; sticky prices; monetary policy (search for similar items in EconPapers)
JEL-codes: E62 E63 F41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (136)

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Working Paper: Fiscal Stimulus with spending reversals (2009)
Working Paper: Fiscal Stimulus with Spending Reversals (2009)
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