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Government investment and fiscal stimulus

Government investment and fiscal stimulus

Fiscal stimulus packages typically feature large investment in infrastructure. The column argues that the fiscal multiplier connected with government investment through the Great Recession was near zero. Meanwhile, the federal government consumption multiplier was around 0.8. Estimates of the multiplier for total government purchases usually do not distinguish both of these effects, which might affect their validity.

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Through the Great Recession, governments enacted fiscal stimulus packages to combat the decline in economic activity. Significant shelling out for long-lived investment goods was common to these policies. In america, for example, the American Recovery and Reinvestment Act of 2009 contained provisions to improve funding to spend a lot more than $70 billion on infrastructure and transportation. 1

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Fiscal stimulus in times of high public debt reconsidering multipliers and twin deficits vox, cepr

Fiscal multipliers and twin deficits: How everything fits together

The national income accounting identities reveal that current account equals the gap between total domestic saving and investment. The public-sector deficit measures public dis-saving. The result of the ‘twin deficits’ (government and current account) to a fiscal shock is thus associated with how private saving and investment choice respond to the shock.

Specifically, private agents’ behaviour depend, inter alia, on what fiscal shocks are perceived. These perceptions will normally rely upon the economic environment – especially debt sustainability.

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Fiscal stimulus via ‘helicopter tax credits’

Fiscal stimulus via ‘helicopter tax credits’

The effect of the clauses will be way much less pro-cyclical than cutting public expenditure and/or raising taxes, as under EU rules, given that they wouldn’t normally drain purchasing power from the economy and would only replace TCCs for euro in investor portfolios.

By combining the introduction of TCCs with the above safeguards, each Eurozone country can trigger a robust recovery while fulfilling the Fiscal Compact and the OMT programme announced by the ECB in 2012, whereby a country’s public debt is guaranteed by the ECB for as long it commits to balancing the budget also to gradually reducing the general public debt-to-GDP ratio (to 60%). Currently, crisis countries lack the instrument to execute countercyclical macroeconomic policies. The TCC programme would provide that instrument, while preventing the ECB have to guarantee increasing volumes of public debts – as TCCs aren’t to be reimbursed, issuing countries can’t be forced to default on them, making the ECB guarantee unnecessary.

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Fiscal stimulus for debt-intolerant countries

Emerging markets on the eve of the sub-prime shock

Fortunately for most emerging markets, this synchronous export and financing shock from the North came once they had built vast war chests of international reserves through the “bonanza” years (Figure 1). Emerging market reserve managers learned the lesson of the Asian Crisis – when times get tough, the advanced economies look inward, so emerging markets’ first type of defence should be their own resources. In the fat years, commodity prices were booming, growth in the North was buoyant, international interest levels were low and stable, and international capital was plentiful. In this environment, fiscal positions in lots of emerging markets improved markedly. Public debt levels were stabilised as well as reduced, and several countries substituted public external debt with domestic debt and lengthened the maturities of their outstanding debt.