Prudential Fiscal Stimulus
58 Pages Posted: 24 Oct 2022 Last revised: 16 Mar 2023
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 Such policies should be implemented rapidly following a shock, and withdrawn more quickly than its dissipation.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: Suggested Citation