Working Paper: CEPR ID: DP7607
Authors: Willem H. Buiter
Abstract: The paper considers the case for an internationally coordinated further fiscal stimulus during the second half of 2009. Although this makes some of the analysis period-specific, most of the issues and principles considered are timeless. For a fiscal stimulus to be both effective there must be idle resources due to a failure of effective demand. For it to be desirable, there must be no alternative policy instruments (including monetary policy) for boosting demand. There must be no complete financial crowding out and no complete direct crowding out, through Ricardian equivalence/debt neutrality, through Minsky equivalence or through a high degree of substitutability between private and public exhaustive expenditure in private preferences or production possibilities. Finally, for international coordination to be desirable, there must be cross-border externalities from national fiscal stimuli. The paper considers each of these conditions in turn.
Keywords: crowding out; debt sustainability; fiscal policy; Minsky neutrality; Ricardian equivalence
JEL Codes: E4; E5; E6; F3; H3; H5; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idle resources (E22) | effectiveness of fiscal stimulus (E62) |
| absence of alternatives (D10) | need for fiscal intervention (E62) |
| absence of complete financial crowding out (E62) | effectiveness of fiscal stimulus (E62) |
| fiscal measures (E62) | displacement of private spending (D10) |
| national fiscal policies (E62) | global economic outcomes (F69) |