Discussion Paper Details

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Title: Fiscal Stimulus with spending reversals

Author(s): Giancarlo Corsetti, André Meier and Gernot Müller

Publication Date: May 2009

Keyword(s): consumption, Fiscal policy transmission, monetary policy, real exchange rate, real interest rates and sticky prices

Programme Area(s): International Macroeconomics

Abstract: The impact of fiscal stimulus depends not only on short-term tax and spending policies, but also on expectations about offsetting measures in the future. This paper analyzes the effects of an increase in government spending under a plausible debt-stabilizing policy that systematically reduces spending below trend over time, in response to rising public liabilities. Accounting for such spending reversals brings an otherwise standard new Keynesian model in line with the stylized facts of fiscal transmission, including the crowding-in of consumption and the `puzzle' of real exchange rate depreciation. Time series evidence for the U.S. supports the empirical relevance of endogenous spending reversals.

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Bibliographic Reference

Corsetti, G, Meier, A and Müller, G. 2009. 'Fiscal Stimulus with spending reversals'. London, Centre for Economic Policy Research.