The Case for Global Fiscal Stimulus

Jaewoo Lee, Douglas Laxton, Michael Kumhof and Charles Freedman

No 2009/003, IMF Staff Position Notes from International Monetary Fund

Abstract: This paper presents simulations with a multicountry structural model to show that worldwide expansionary fiscal policy combined with accommodative monetary policy can have significant multiplier effects on the world economy. It also provides a framework for assessing the effects of fiscal actions needed to help counter the projected contractionary pressures in the world economy. In an ideal scenario where fiscal stimulus is both global and supported by monetary accommodation, and where financial sectors that are under pressure are being supported by governments, every dollar spent on government investment can increase GDP by about $3, while every dollar of targeted transfers can increase GDP by about $1. In countries in which fiscal space is limited, it will be especially important to focus fiscal stimulus actions on those measures that will have the largest effect on aggregate demand. It is particularly important for fiscal policy to take on an increased share of the burden during the period in which the financial sector is recovering and is not yet able or willing to extend credit to households and businesses to the extent that it normally does.

Keywords: SPN; GDP; debt; risk premia; reaction function; investment expenditure; crowding-out effect; monetary policy action; deficit-to GDP ratio; distortionary effect; output effect; monetary policy work; GDP ratio; monetary policy reaction; stimulative effect; Fiscal stimulus; Real interest rates; Accommodative monetary policy; Fiscal multipliers; Global; Asia and Pacific (search for similar items in EconPapers)
Pages: 27
Date: 2009-03-06
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Citations: View citations in EconPapers (51)

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