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Alternative Public Spending Rules and Output Volatility

Jean-Paul Lam () and William Scarth

Staff Working Papers from Bank of Canada

Keywords: Economic models; Fiscal policy; Transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E58 E62 (search for similar items in EconPapers)
Pages: 24 pages Abstract: One of the central lessons learned from the Great Depression was that adjusting government spending each year to balance the budget increases the volatility of output. We compare this policy with one that involves running temporary deficits and surpluses and an average budget balance of zero. Our analysis allows monetary policy to adjust to a change in fiscal regime, and the specifications for aggregate demand and supply are consistent with the "new neoclassical synthesis." Our results give only limited support to the conventional wisdom on fiscal rules and stability of output.
Date: 2002
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