EXPECTATIONS AND FISCAL STIMULUS

Troy Davig () and Eric Leeper
Additional contact information
Troy Davig: Federal Reserve Bank of Kansas City

No 2009-006, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: Increases in government spending trigger substitution effects—both inter- and intra-temporal—and a wealth effect. The ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes create a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between active and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model’s predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act’s implied path for government spending under alternative monetary-fiscal policy combinations.

Pages: 35 pages
Date: 2009-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2009-006.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2009006

Access Statistics for this paper

More papers in CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington Contact information at EDIRC.
Bibliographic data for series maintained by Center for Applied Economics and Policy Research ().