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DOES FISCAL POLICY MATTER? BLINDER AND SOLOW REVISITED

Published online by Cambridge University Press:  04 November 2011

Roger E. A. Farmer  and
Dmitry Plotnikov
Roger E. A. Farmer*
Affiliation:
University of California, Los Angeles
Dmitry Plotnikov
Affiliation:
University of California, Los Angeles
*
Address correspondence to: Roger E. A. Farmer, Department of Economics, University of California, Los Angeles, 8283 Bunche Hall, Los Angeles, CA 90095-1477, USA; e-mail: rfarmer@econ.ucla.edu.
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Abstract

This paper uses the old Keynesian representative agent model developed by Roger E. A. Farmer [Expectations, Employment and Prices. New York: Oxford University Press (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. However, in contrast to Farmer's experiment, we find that a temporary increase in government purchases can also reduce unemployment.

Keywords

UnemploymentFiscal PolicyCrowding Out
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Supplement S1: Nonlinear Dynamics in Equilibrium Models , April 2012 , pp. 149 - 166
Copyright
Copyright © Cambridge University Press 2011

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