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Alternative Public Spending Rules and Output Volatility

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  • Jean-Paul Lam
  • William Scarth

Abstract

One of the central lessons learned from the Great Depression was that adjusting government spending each year to balance the budget increases the volatility of output. We compare this policy with one that involves running temporary deficits and surpluses and an average budget balance of zero. Our analysis allows monetary policy to adjust to a change in fiscal regime, and the specifications for aggregate demand and supply are consistent with the "new neoclassical synthesis." Our results give only limited support to the conventional wisdom on fiscal rules and stability of output.
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Suggested Citation

  • Jean-Paul Lam & William Scarth, 2002. "Alternative Public Spending Rules and Output Volatility," Staff Working Papers 02-37, Bank of Canada.
    • Handle: RePEc:bca:bocawp:02-37
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Economic models; Fiscal policy; Transmission of monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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