The Dark Side of Fiscal Stimulus

Center for European, Governance and Economic Development Research Discussion Paper No. 151

39 Pages Posted: 29 Jan 2013

See all articles by Holger Strulik

Holger Strulik

University of Goettingen (Göttingen) - School of Law, Economics, Social Sciences

Timo Trimborn

University of Goettingen (Göttingen)

Multiple version iconThere are 2 versions of this paper

Date Written: January 28, 2013

Abstract

Most of the discussion about fiscal stimulus focuses on the multiplier of government spending on impact. In this paper we shift the focus to the multiplier at the end, i.e. to the period in which a deficit spending program terminates. We show that recent time series analyses as well as models of different schools of thought predict that the multiplier turns negative before spending expires. This means that aggregate output at the time of expiry of fiscal stimulus is predicted to be lower than it could be without deficit spending. We set up a simple model that explains this phenomenon. Using phase diagram analysis we prove that the aggregate capital stock at the time of expiry of fiscal stimulus is lower than it would be without the deficit spending program. This fact explains why aggregate output is below its laissez faire level as well. We then calibrate an extended version of the model for the US and demonstrate how fiscal stimulus slows down recovery from a recession in the medium-run.

Keywords: fiscal stimulus, government spending, output multiplier, economic recovery

JEL Classification: E60, H30, H50, O40

Suggested Citation

Strulik, Holger and Trimborn, Timo, The Dark Side of Fiscal Stimulus (January 28, 2013). Center for European, Governance and Economic Development Research Discussion Paper No. 151, Available at SSRN: https://ssrn.com/abstract=2207853 or http://dx.doi.org/10.2139/ssrn.2207853

Holger Strulik (Contact Author)

University of Goettingen (Göttingen) - School of Law, Economics, Social Sciences ( email )

Germany

Timo Trimborn

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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