Prudential Fiscal Stimulus

Abstract

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 Such policies should be implemented rapidly following a shock, and withdrawn more quickly than its dissipation.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