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The theory of the fiscal stimulus: how will a debt-financed stimulus affect the future?

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  • W. Max Corden

Abstract

This paper takes a close look at the Keynesian theory underlying the policy of fiscal stimulus being undertaken or considered in many countries, led by the United States. A central question is whether a debt-financed fiscal stimulus now must adversely affect future taxpayers, owing to the debt burden being created. There are many interesting issues considered, for example, the role of automatic stabilizers, and the basis for Keynes's paradox of thrift. The model used is for a single country with a floating exchange rate. It is assumed that, for various reasons, monetary policy cannot eliminate high unemployment and a resultant output gap . In fact, there is a market failure, which government action needs to compensate for, at least temporarily. Copyright 2010, Oxford University Press.

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  • W. Max Corden, 2010. "The theory of the fiscal stimulus: how will a debt-financed stimulus affect the future?," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 26(1), pages 38-47, Spring.
    • Handle: RePEc:oup:oxford:v:26:y:2010:i:1:p:38-47
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    File URL: http://hdl.handle.net/10.1093/oxrep/grq001
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    Cited by:

    1. Abdurohman & Budy P. Resosudarmo, 2017. "The Behavior Of Fiscal Policy In Indonesia In Response To Economic Cycles," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(02), pages 377-401, June.
    2. I. A. Sokolov & S. G. Belev & O. V. Suchkova, 2021. "How to Ensure Fiscal Sustainability in Russia," Studies on Russian Economic Development, Springer, vol. 32(4), pages 383-390, July.
    3. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
    4. W. Corden, 2011. "Ambulance Economics: The Pros and Cons of Fiscal Stimuli," Open Economies Review, Springer, vol. 22(2), pages 235-245, April.
    5. Neil Hart, 2011. "Mainstream Macroeconomics: A ‘Keynesian’ Revival?," The Economic and Labour Relations Review, , vol. 22(1), pages 17-40, May.
    6. Verick, Sher. & Islam, Iyanatul,, 2010. "The great recession of 2008-2009 : causes, consequences and policy responses," ILO Working Papers 994576933402676, International Labour Organization.
    7. Mosley, Max, 2021. "The importance of being earners: Modelling the implications of changes to welfare contributions on macroeconomic recovery," MPRA Paper 108620, University Library of Munich, Germany.
    8. repec:ilo:ilowps:457693 is not listed on IDEAS
    9. Budy P. Resosudarmo & Abdurohman & Arief A. Yusuf & Djoni Hartono, 2021. "Spatial impacts of fiscal stimulus policies during the 2009 global financial crisis in Indonesia," Asia-Pacific Journal of Regional Science, Springer, vol. 5(1), pages 305-326, February.
    10. Jha, Shikha & Mallick, Sushanta K. & Park, Donghyun & Quising, Pilipinas F., 2014. "Effectiveness of countercyclical fiscal policy: Evidence from developing Asia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 82-98.

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