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Pros and Cons of various fiscal measures to stimulate the economy

Carine Bouthevillain, John Caruana, Cristina Checherita Westphal, Jorge Cunha, Esther Gordo (), Stephan Haroutunian, Amela Hubic (), Geert Langenus, Bernhard Manzke, Javier Pérez () and Pietro Tommasino ()

No 40, BCL working papers from Central Bank of Luxembourg

Abstract: We review the theoretical and empirical literature on the effects of discretionary fiscal policies, against the background of renewed fiscal policy activism. In this sense, we analyze the main pros and cons of various fiscal tools to stimulate the economy. We show that it is extremely difficult to elaborate an unambiguous catalogue of measures defining an ?optimal? fiscal package. Among the requirements that fiscal measures should be ?timely, targeted and temporary? (TTT), the implementation of the first one ? timeliness ? is the least controversial criterion in the current situation. On the basis of the literature review, we provide some hints on the appropriate composition of a fiscal stimulus packages. The review of the pros and cons of short-term fiscal stimulus packages cannot be decoupled from the discussion of the ?exit strategies?, i.e. the means of financing fiscal expansions, and the intertemporal consistency of fiscal plans.

Date: 2009-09
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