Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits

41 Pages Posted: 24 Nov 2009

See all articles by Michael Kumhof

Michael Kumhof

CEPR

Dirk Muir

Bank of Canada

Charles Freedman

Government of Canada - Bank of Canada; National Bureau of Economic Research (NBER)

Susanna Mursula

International Monetary Fund (IMF)

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Date Written: November 2009

Abstract

This paper uses the IMF's Global Integrated Monetary and Fiscal Model to compute shortrun multipliers of fiscal stimulus measures and long-run crowding-out effects of higher debt. Multipliers of two-year stimulus range from 0.2 to 2.2 depending on the fiscal instrument, the extent of monetary accommodation and the presence of a financial accelerator mechanism. A permanent 0.5 percentage point increase in the U.S. deficit to GDP ratio raises the U.S. tax burden and world real interest rates in the long run, thereby reducing U.S. and rest of the world output by 0.3-0.6 and 0.2 percent, respectively.

Keywords: Budget deficits, Economic models, External shocks, Financial crisis, Financial sector, Fiscal policy, Global Financial Crisis 2008-2009, Government expenditures, International financial system, Monetary policy, Productivity, Public debt

Suggested Citation

Kumhof, Michael and Muir, Dirk and Freedman, Charles and Mursula, Susanna and Laxton, Douglas, Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits (November 2009). IMF Working Paper No. 09/255, Available at SSRN: https://ssrn.com/abstract=1512260

Michael Kumhof (Contact Author)

CEPR ( email )

London
United Kingdom

Dirk Muir

Bank of Canada ( email )

234 Wellington Street
Ontario, Ontario K1A 0G9
Canada

Charles Freedman

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ontario K1A 0G9
Canada
613 782-8045 (Phone)
613 782-7003 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Susanna Mursula

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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