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Home Publications Reports Stimulus and Fiscal Consolidation: The Evidence and Implications

Stimulus and Fiscal Consolidation: The Evidence and Implications

July 2014, Dean Baker and David Rosnick

This analysis looks at the evidence on the effects of stimulus packages and fiscal consolidation during a severe economic slump, as the recent economic crisis. The first part deals with the most important literature on the subject, the consensus in the research of the past decade attests a clear counter-cyclical effect of stimulus packages during a prolonged recession. The second part deals with the impact of changes in government consumption and investment to growth. For this data for developed countries in 1980 are analyzed. Consistent with much of the previous literature have increased government spending during a crisis has a positive effect on economic growth. In addition, the period is simulated after the crisis, the multiplier effect is around 1.5. The third part focuses on the production potential, which has declined sharply due to the economic crisis. This would have to include a comprehensive model that analyzes the effects of an economic stimulus package with, since the effect could turn out relative to the size of the stimulus package as significant.

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