Deficits, Public Debt Dynamics and Tax and Spending Multipliers

31 Pages Posted: 27 Feb 2013

See all articles by Matthew Denes

Matthew Denes

Carnegie Mellon University - Tepper School of Business

Sonia Gilbukh

City University of New York - Department of Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: February 2013

Abstract

Cutting government spending can increase the budget deficit at zero interest rates according to a standard New Keynesian model, calibrated with Bayesian methods. Similarly, increasing sales taxes can increase the budget deficit rather than reducing it. Both results suggest limitations of ‘austerity measures’. At zero interest rates, running budget deficits can be either expansionary or contractionary depending on how they interact with expectations about long‐run taxes and spending. The effect of fiscal policy action is thus highly dependent on the policy regime. A successful stimulus, therefore, needs to specify how the budget is managed not only in the short but also medium and long run.

Suggested Citation

Denes, Matthew and Gilbukh, Sonia, Deficits, Public Debt Dynamics and Tax and Spending Multipliers (February 2013). The Economic Journal, Vol. 123, Issue 566, pp. 133-163, 2013. Available at SSRN: https://ssrn.com/abstract=2225648 or http://dx.doi.org/10.1111/ecoj.12014

Matthew Denes (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://sites.google.com/site/matthewdenes

Sonia Gilbukh

City University of New York - Department of Real Estate ( email )

United States

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