Bundesbank: fiscal stimulus contractionary in long term
A Bundesbank paper published on Monday finds debt-financed fiscal stimulus is expansionary in the short run but contractionary in the long run.
Rym Aloui, the paper's author, analyses the effects of debt-financed lump-sum fiscal policy on public debt and the economy by measuring countercyclical mark-up movements in an extended stochastic version of overlapping generations model.
The results show that when prices are sticky, a rise in public debt to finance tax cuts stimulates aggregate demand
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