Comparing Fiscal Strategies for the U.S. in a New Keynesian Framework

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Abstract/Contents

Abstract: In this paper, I use Coenen, McAdam, and Straub’s (2008) (CMS) structural macroeconomic model to compare and contrast three fiscal strategies for the U.S.: (1) short-run stimulus followed by fiscal consolidation, with stimulus financed by future spending reductions, (2) short-run stimulus followed by fiscal consolidation, with stimulus financed by future tax rate increases, and (3) short-run stimulus followed by permanently higher spending in the form of transfers. My analysis follows the framework of analysis done by Cogan et al. (2013) on fiscal consolidation strategies in the same model. I find that the model produces a temporary positive output effect from the short-run stimulus, followed by negative effects on output due to the conclusion and subsequent payment of stimulus. Long-run fiscal consolidation after stimulus is more favorable than permanently higher spending because it decreases the medium- and long-run output cost of stimulus and creates favorable conditions for long-run growth. Stimulus financed by spending reductions is preferable to tax financed stimulus in terms of output growth generated. Lastly, permanently higher spending in terms of transfers is particularly harmful to growth.

Type of resource	text
Date created	May 2014

Author	Liu, Robert
Primary advisor	Boskin, Michael J.
Degree granting institution	Stanford University, Department of Economics

Subject	Stanford Department of Economics
Subject	fiscal consolidation
Subject	CMS model
Subject	stimulus
Subject	output growth
Subject	structural model
Genre	Thesis

Related item	Title 2014 Firestone Medal for Excellence in Undergraduate Research
Location	https://purl.stanford.edu/vf248tv1026

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Preferred Citation: Liu, Robert. (2014). Comparing Fiscal Strategies for the U.S. in a New Keynesian Framework. Stanford Digital Repository. Available at: https://purl.stanford.edu/vf248tv1026

Stanford University, Department of Economics, Honors Theses

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