The unintended consequences of the debt ... will increased government expenditure hurt the economy?

In 2008, governments in many countries embarked on large fiscal expenditure programmes, with the intention to support the economy and prevent a more serious recession. In this study, the overall impact of a substantial i
In 2008, governments in many countries embarked on large fiscal expenditure programmes, with the intention to support the economy and prevent a more serious recession. In this study, the overall impact of a substantial increase in fiscal expenditure is considered by providing a novel analysis of the most relevant recent experience in similar circumstances, namely that of Japan in the 1990s. Then a weak economy with risk-averse banks seemed to require some of the largest peacetime fiscal stimulation programmes on record, albeit with disappointing results. The explanations provided by the literature and their unsatisfactory empirical record are reviewed. An alternative explanation, derived from early Keynesian models on the ineffectiveness of fiscal policy is presented in the form of a modified Fisher-equation, which incorporates the recent findings in the credit view literature. The model postulates complete quantity crowding out. It is subjected to empirical tests, which were supportive. Thus evidence is found that fiscal policy, if not supported by suitable monetary policy, is likely to crowd out private sector demand, even in an environment of falling or near-zero interest rates. As a policy conclusion it is pointed out that by changing the funding strategy, complete crowding out can be avoided and a positive net effect produced. The proposed framework creates common ground between proponents of Keynesian views (as held, among others, by Blinder and Solow), monetarist views (as held in particular by Milton Friedman) and those of leading contemporary macroeconomists (such as Mankiw).
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Metadaten
Author:Richard A. Werner
URN:urn:nbn:de:hebis:30:3-241172
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2011,26
Series (Serial Number):CFS working paper series (2011, 26)
Publisher:Goethe-Univ., House of Finance, Center for Financial Studies
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2011
Year of first Publication:2011
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2012/02/07
Tag:Credit; Crowding Out; Equation of Exchange; Fiscal Policy; Japan ; Monetarism; Monetary Policy; Quantity Equation
Issue:Version: September 2011
Pagenumber:39
HeBIS PPN:312322364
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E51 Money Supply; Credit; Money Multipliers
E62 Fiscal Policy
H30 General
H60 General
O42 Monetary Growth Models
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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