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Temporary vs. Permanent Increases in Government Spending

Not long ago Paul Krugman wrote:

To a first approximation, in other words, the effect of current fiscal policy — whether stimulus or austerity — an [on?] the actions of future governments is zero.

He makes further points at the link, although there is not a citation to the literature. I thought we should look at the evidence a little more closely. Some of it contradicts Krugman as read literally, though it is not all bad news for his larger point.

Here is an abstract from Brian Goff:

In spite of Peacock and Wiseman’s 1961 NBER study demonstrating the “displacement effect”, simplistic theoretical and empirical distinctions between temporary and permanent spending are common. In this paper, impulse response functions from ARMA models as well as Cochrane’s non-parametric method support Peacock and Wiseman’s conclusion by showing 1) government spending in the aggregate displays strong persistence to temporary shocks, 2) simple decomposition methods intended to yield a “temporary” spending series have a weak statistical foundation, and 3) persistence in spending has increased during this century. Also, as a basic “fact” of government spending behavior, the displacement effect lends support to interest group and bureaucracy models of government spending growth.

There is persistence to spending, although this study does not create a category for stimulus spending per se, however that concept might be defined.

Click here to read the full article


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