Does Fiscal Policy Matter? Blinder and Solow Revisited

32 Pages Posted: 27 Dec 2010 Last revised: 25 Jun 2023

See all articles by Roger E. A. Farmer

Roger E. A. Farmer

University of Warwick; University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); National Institute of Economic and Social Research (NIESR)

Dmitry Plotnikov

University of California, Los Angeles (UCLA) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2010

Abstract

This paper uses the old-Keynesian representative agent model developed in Farmer (2010b) 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 (2010b). However, in contrast to Farmer's experiment we find that a temporary increase in government purchases can also reduce unemployment.

Suggested Citation

Farmer, Roger E.A. and Plotnikov, Dmitry, Does Fiscal Policy Matter? Blinder and Solow Revisited (December 2010). NBER Working Paper No. w16644, Available at SSRN: https://ssrn.com/abstract=1730885

Roger E.A. Farmer (Contact Author)

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Dmitry Plotnikov

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