Working Paper: CEPR ID: DP7130
Authors: Antonio Spilimbergo; Steven Symansky; Olivier J. Blanchard; Carlo Cottarelli
Abstract: The current crisis calls for two main sets of policy measures. First, measures to repair the financial system. Second, measures to increase demand and restore confidence. While some of these measures overlap, the focus of this note is on the second set of policies, and more specifically, given the limited room for monetary policy, on fiscal policy. The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived probability of another ?Great Depression? requires a commitment to do more, if needed; collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt explosion and adverse reactions of financial markets. Looking at the content of the fiscal package, in the current circumstances, spending increases, and targeted tax cuts and transfers, are likely to have the highest multipliers. General tax cuts or subsidies, either for consumers or for firms, are likely to have lower multipliers.
Keywords: Fiscal policy; Financial crisis; Fiscal stimulus
JEL Codes: H30; E60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| timely and large fiscal packages (E62) | economic recovery during financial crises (G01) |
| decrease in private demand (D12) | need for timely and large fiscal packages (E62) |
| lasting fiscal measures (E62) | economic recovery during financial crises (G01) |
| diversified fiscal measures (E62) | economic recovery during financial crises (G01) |
| contingent fiscal measures (E62) | economic recovery during financial crises (G01) |
| collective fiscal efforts (H39) | economic recovery during financial crises (G01) |
| targeted tax cuts (H23) | higher multipliers (C39) |
| increased public spending (H59) | higher multipliers (C39) |
| failure to maintain fiscal sustainability (H69) | increased borrowing costs (F65) |
| failure to maintain fiscal sustainability (H69) | undermine recovery prospects (E65) |