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"Is Fiscal Stimulus a Good Idea?,"
revised March 2014.
The results in this paper, using a structural multi-country macroeconometric
model, suggest that there is at most a small
gain from fiscal
stimulus in the form of increased transfer payments or increased tax
deductions if the increased debt generated must eventually be
paid back. The gain in output and employment on the way up is roughly
offset by the loss in output and employment on the way down as the
debt from the initial stimulus is paid off.
This conclusion is robust to different assumptions about
To the extent that there is a gain, the longer one
waits to begin paying the debt back the better.
Possible caveats regarding the model used are that 1) monetary policy
is not powerful enough to keep the economy at full employment,
2) potential output is taken to be exogenous,
permanent effects on asset prices and animal spirits from a stimulus
are not taken into account, and 4) the model does not have the feature
that in really bad times the economy might collapse without a stimulus.