Prudential Fiscal Stimulus

58 Pages Posted: 24 Oct 2022 Last revised: 16 Mar 2023

See all articles by Alfred Duncan

Alfred Duncan

University of Kent - School of Economics

Charles Nolan

University of Glasgow

Date Written: March 16, 2023


Anticipated stimulus policies enacted perhaps in response to a crisis can motivate precautionary behaviour during the preceding expansion. Ex post stimulus can be ex ante prudential. Prudential fiscal stimulus both speeds up economic recoveries, and prevents crises from occurring in the first place. Prudential fiscal stimulus policies can be simple: a wage subsidy simple rule conditioned on real output can generate sizeable stimulus in downturns while improving precautionary incentives in good times. Prudential fiscal stimulus improves welfare, even in the absence of traditional aggregate demand externalities. Such policies should be implemented rapidly following a shock, and withdrawn more quickly than its dissipation.

Keywords: Macroeconomics, Fiscal Stimulus, Incomplete Markets, Macroprudential policy

JEL Classification: E32, D52

Suggested Citation

Duncan, Alfred and Nolan, Charles, Prudential Fiscal Stimulus (March 16, 2023). Available at SSRN: or

Alfred Duncan (Contact Author)

University of Kent - School of Economics ( email )

United Kingdom

HOME PAGE: http://

Charles Nolan

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

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