Working Paper: CEPR ID: DP8189
Authors: Roger E. A. Farmer; Dmitry Plotnikov
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.
Keywords: crowding out; fiscal policy
JEL Codes: E0; E12; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased government purchases (H59) | Crowding out of private consumption (E21) |
| Increased government purchases (H59) | Decrease in unemployment (J68) |