Discussion Paper Details

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Title: Fiscal stimulus and the promise of future spending cuts

Author(s): Volker Wieland

Publication Date: December 2009

Keyword(s): discretionary fiscal policy, fiscal multiplier, fiscal stimulus, government spending, macroeconomic modeling and New Keynesian Model

Programme Area(s): International Macroeconomics

Abstract: Recent evaluations of the fiscal stimulus packages enacted in 2009 in the United States and Europe such as Cogan, Cwik, Taylor and Wieland (2009) and Cwik and Wieland (2009) suggest that the GDP effects will be modest due to crowding-out of private consumption and investment. Corsetti, Meier and Mueller (2009a,b) argue that spending shocks are typically followed by consolidations with substantive spending cuts, which enhance the short-run stimulus effect. This note investigates the implications of this argument for the estimated impact of recent stimulus packages and the case for discretionary fiscal policy.

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Bibliographic Reference

Wieland, V. 2009. 'Fiscal stimulus and the promise of future spending cuts'. London, Centre for Economic Policy Research.