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Does Fiscal Policy Matter? Blinder and Solow Revisited

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  • Farmer, Roger
  • Plotnikov, Dmitry

Abstract

This paper uses the old-Keynesian representative agent model developed in Farmer (2010) to answer two questions: 1) do increased government purchases crowd out private consumption? 2) do increased government purchases reduce unemployment? Farmer compared permanent tax financed expenditure paths and showed that the answer to 1) was yes and the answer to 2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer (2010). However, in contrast to Farmer?s experiment we find that a temporary increase in government purchases can also reduce unemployment.

Suggested Citation

  • Farmer, Roger & Plotnikov, Dmitry, 2011. "Does Fiscal Policy Matter? Blinder and Solow Revisited," CEPR Discussion Papers 8189, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8189
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    1. Christina D. Romer, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 597-624.
    2. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    3. Farmer, Roger, 2010. "Animal Spirits, Persistent Unemployment and the Belief Function," CEPR Discussion Papers 8100, C.E.P.R. Discussion Papers.
    4. Roger E. A. Farmer, 2008. "Aggregate demand and supply," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(1), pages 77-93, March.
    5. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    6. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    7. Ohanian, Lee E., 2009. "What - or who - started the great depression?," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2310-2335, November.
    8. Vasilev, Aleksandar & Maksumov, Rashid, 2010. "Critical analysis of Chapter 23 of Keynes’s Notes on Mercantilism in The General Theory of Employment, Interest and Money (1936)," EconStor Research Reports 155318, ZBW - Leibniz Information Centre for Economics.
    9. Harrison, Sharon G. & Weder, Mark, 2006. "Did sunspot forces cause the Great Depression?," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1327-1339, October.
    10. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
    11. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
    12. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
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    Citations

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    Cited by:

    1. Marco Guerrazzi, 2022. "How Long does a Generation Last? Assessing the Relationship Between Infinite and Finite Horizon Dynamic Models," Economic Papers, The Economic Society of Australia, vol. 41(1), pages 89-98, March.
    2. Riccardo Magnani, 2015. "The Solow Growth Model Revisited. Introducing Keynesian Involuntary Unemployment," Working Papers hal-01203393, HAL.
    3. Farmer, Roger E.A., 2016. "The Evolution Of Endogenous Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 20(2), pages 544-557, March.
    4. Roger E.A. Farmer & Carine Nourry & Alain Venditti, 2012. "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World," NBER Working Papers 18647, National Bureau of Economic Research, Inc.
    5. Roger E A Farmer, 2020. "The importance of beliefs in shaping macroeconomic outcomes," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 36(3), pages 675-711.
    6. Sanz Labrador, Ismael & Sanz-Sanz, José Félix, 2013. "Política fiscal y crecimiento económico: consideraciones microeconómicas y relaciones macroeconómicas," Macroeconomía del Desarrollo 5367, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    7. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, March.
    8. Charl Jooste & Ruthira Naraidoo, 2017. "The Macroeconomics Effects of Government Spending Under Fiscal Foresight," South African Journal of Economics, Economic Society of South Africa, vol. 85(1), pages 68-85, March.
    9. Riccardo Magnani, 2015. "The Solow Growth Model Revisited. Introducing Keynesian Involuntary Unemployment," CEPN Working Papers hal-01203393, HAL.
    10. Farmer, Roger, 2011. "Animal Spirits, Financial Crises and Persistent Unemployment," CEPR Discussion Papers 8439, C.E.P.R. Discussion Papers.
    11. Viktar Fedaseyeu & Vitaliy Strohush, 2012. "Loans from the Government, Overinvestment by Households, and Asset Bubbles," Working Papers 443, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    12. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    13. Rozina Shaheen, 2019. "Impact of Fiscal Policy on Consumption and Labor Supply under a Time-Varying Structural VAR Model," Economies, MDPI, vol. 7(2), pages 1-15, June.
    14. Janusz Jabłonowski, 2022. "Crowding Out of Informal Economy Labour Supply by Unconditional Child Benefits," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 31-43.
    15. Farmer, Roger E.A., 2012. "The stock market crash of 2008 caused the Great Recession: Theory and evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 693-707.

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    More about this item

    Keywords

    Crowding out; Fiscal policy;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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