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Fiscal Stimulus and Fiscal Sustainability

Alan Auerbach and Yuriy Gorodnichenko

No 23789, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Great Recession and the Global Financial Crisis have left many developed countries with low interest rates and high levels of public debt, thus limiting the ability of policymakers to fight the next recession. Whether new fiscal stimulus programs would be jeopardized by these already heavy public debt burdens is a central question. For a sample of developed countries, we find that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness. Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study. Even in countries with high public debt, the penalty for activist discretionary fiscal policy appears to be small.

JEL-codes: E62 H62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
Date: 2017-09
Note: EFG PE
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