The Theory Of The Fiscal Stimulus: How Will A Debt-Financed Stimulus Affect The Future?

Date Added: Jun 2009
Format: PDF

Conservative critics of Keynesian fiscal stimulus policies usually criticize such policies because of the increase in public debt that results. Hence a burden on future taxpayers would be imposed. But there are qualifications. Firstly, if there is an initial output gap that cannot be eliminated with monetary policy, fiscal expansion will increase current output, and this will lead not only to higher current consumption but also to higher savings. These savings will yield a benefit for the future. Secondly, if at least some of the stimulus finances public investment, for example in infrastructure, there are also likely to be benefits for the future.