Does Fiscal Policy Matter? Blinder and Solow Revisited

Roger Farmer and Dmitry Plotnikov

No 8189, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper uses the old-Keynesian representative agent model developed in Farmer (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 (2010). However, in contrast to Farmer?s experiment we find that a temporary increase in government purchases can also reduce unemployment.

Keywords: Crowding out; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E0 E12 E62 (search for similar items in EconPapers)
Date: 2011-01
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: DOES FISCAL POLICY MATTER? BLINDER AND SOLOW REVISITED (2012)
Working Paper: Does Fiscal Policy Matter? Blinder and Solow Revisited (2012)
Working Paper: Does Fiscal Policy Matter? Blinder and Solow Revisited (2010)
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