Working Paper: NBER ID: w23789
Authors: Alan J. Auerbach; Yuriy Gorodnichenko
Abstract: The Great Recession and the Global Financial Crisis have left many developed countries with low interest rates and high levels of public debt, thus limiting the ability of policymakers to fight the next recession. Whether new fiscal stimulus programs would be jeopardized by these already heavy public debt burdens is a central question. For a sample of developed countries, we find that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness. Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study. Even in countries with high public debt, the penalty for activist discretionary fiscal policy appears to be small.
Keywords: Fiscal Policy; Debt Sustainability; Economic Recession
JEL Codes: E62; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending shocks (E62) | debt-to-GDP ratios (H68) |
| government spending shocks (E62) | borrowing costs (H74) |
| fiscal stimulus in weak economies (E62) | fiscal sustainability metrics (E62) |
| fiscal stimulus in weak economies (E62) | debt-to-GDP ratio (H68) |
| high public debt levels (H69) | responses of interest rates and CDS spreads (E43) |
| discretionary fiscal policies (E62) | penalty associated with high public debt levels (H63) |