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Prudential Fiscal Stimulus

Author

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  • Alfred Duncan
  • Charles Nolan

Abstract

Anticipated stimulus policies enacted perhaps in response to a crisis can motivate precautionary behaviour during the preceding expansion. Ex post stimulus can be ex ante prudential. Prudential fiscal stimulus both speeds up economic recoveries, and prevents crises from occurring in the first place. Prudential fiscal stimulus policies can be simple: a wage subsidy simple rule conditioned on real output can generate sizeable stimulus in downturns while improving precautionary incentives in good times. Prudential fiscal stimulus improves welfare, even in the absence of traditional aggregate demand externalities. Such policies should be implemented rapidly following a shock, and withdrawn more quickly than its dissipation.

Suggested Citation

  • Alfred Duncan & Charles Nolan, 2024. "Prudential Fiscal Stimulus," Working Papers 2024_03, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2024_03
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    File URL: https://www.gla.ac.uk/media/Media_1050598_smxx.pdf
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    References listed on IDEAS

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    1. Alfred Duncan, 2021. "Reverse mode differentiation for DSGE models," Studies in Economics 2108, School of Economics, University of Kent.
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      More about this item

      Keywords

      Macroeconomics; Fiscal Stimulus; Incomplete Markets.;
      All these keywords.

      JEL classification:

      • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
      • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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