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Fiscal stimulus in a high-debt economy? A DSGE analysis

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  • Wang, Shu-Ling
Abstract
Intended stimulus effects are attenuated if expansionary policies are conducted at the cost of debt rollover, high interest payments, and heavy taxes. This paper examines the stimulus effects of fiscal instruments, considering a country's initial debt level. Using a neoclassical model calibrated to Greece, I find that: [1] increasing public consumption (investment) [wages] generates short-lived (long-lasting) [no] stimulus effects; [2] a rise in the interest rate spread reduces public consumption (investment) multiplier by 0.77 (only 0.27); [3] implementation delays in public investment yield the benefit of lower debt-to-GDP ratios, partly offsetting the cost of delays; [4] a high degree of consumption complementarity produces sizable expansionary effects, but it yields a worse fiscal position; [5] faster tax adjustments to government debt result in larger government-spending multipliers. In sum, whether to conduct stimulus measures or not hinges on a country's debt position, tools used, the speed at which debt is retired, and policy purposes.

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  • Wang, Shu-Ling, 2021. "Fiscal stimulus in a high-debt economy? A DSGE analysis," Economic Modelling, Elsevier, vol. 98(C), pages 118-135.
    • Handle: RePEc:eee:ecmode:v:98:y:2021:i:c:p:118-135
    DOI: 10.1016/j.econmod.2021.02.009
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    More about this item

    Keywords

    Fiscal stimulus; Debt dependence; Interest rate spread; Debt financing; Implementation delays; Consumption complementarity;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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