We investigate the theoretical conditions for effectiveness of government consumption
expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place
when monetary policy is accommodative lead to large output multipliers in normal times.
The 2009-2010 packages need not produce significant output multipliers, may have
moderate debt effects, and only generate temporary inflation. Expenditure expansions
accompanied by deficit/debt consolidations schemes may lead to short run output ...
We investigate the theoretical conditions for effectiveness of government consumption
expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place
when monetary policy is accommodative lead to large output multipliers in normal times.
The 2009-2010 packages need not produce significant output multipliers, may have
moderate debt effects, and only generate temporary inflation. Expenditure expansions
accompanied by deficit/debt consolidations schemes may lead to short run output gains but
their success depends on how monetary policy and expectations behave. Trade openness
and the cyclicality of the labor wedge explain cross-country differences in the magnitude of
the multipliers.
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