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The dark side of fiscal stimulus

Holger Strulik () and Timo Trimborn ()

No 150, Center for European, Governance and Economic Development Research Discussion Papers from University of Goettingen, Department of Economics

Abstract: Most of the discussion about fiscal stimulus focuses on the multiplier of government spending on impact. In this paper we shift the focus to the multiplier at the end, i.e. to the period in which a deficit spending program terminates. We show that recent time series analyses as well as economic models of different schools of thought predict that the multiplier turns negative before spending expires. This means that aggregate output at the time of expiry of fiscal stimulus is predicted to be lower than it could be without deficit spending. We set up a simple model that explains this phenomenon. Using phase diagram analysis we prove that the aggregate capital stock at the time of expiry of fiscal stimulus is lower than it would be without the deficit spending program. This fact explains why aggregate output is below its laissez faire level as well. We then calibrate an extended version of the model for the US and demonstrate how fiscal stimulus slows down recovery from a recession in the medium-run.

Keywords: fiscal stimulus; government spending; output multiplier; economic recovery (search for similar items in EconPapers)
JEL-codes: E60 H30 H50 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
Date: 2013
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Related works:
Working Paper: The Dark Side of Fiscal Stimulus (2011) Downloads
Working Paper: The Dark Side of Fiscal Stimulus (2011) Downloads
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