Description

We develop a simple model to examine the conditions under which delaying fiscalconsolidation can affect the present value of GDP via the fiscal stance’s effects on theoutput gap and hysteresis. We find that the absolute size of the fiscal multiplier—the focusof much empirical investigation and policy debate—is likely inconsequential in thisregard. Rather, what matters is the degree to which the multiplier during the initial periodof fiscal stimulus differs from the multiplier when the stimulus is withdrawn. If themultiplier is constant over time, delaying consolidation is unlikely to significantly boostthe present value of GDP via effects on the output gap and hysteresis. The potentialsuccess of such efforts relies instead on exploiting time-variation in multipliers.

More publications in this series: Working Papers

More publications by: Kevin Fletcher ; Damiano Sandri