DP7615 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, New Keynesian Model
JEL(s): C52, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7615

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.