Must-Read: Alan J. Auerbach and Yuriy Gorodnichenko: Fiscal Stimulus and Fiscal Sustainability

Must-Read: Alan J. Auerbach and Yuriy Gorodnichenko: FISCAL STIMULUS AND FISCAL SUSTAINABILITY: “The Great Recession and the Global Financial Crisis have left many developed countries with low interest rates and high levels of public debt… https://www.kansascityfed.org/~/media/files/publicat/sympos/2017/auerbach-gorodnichenko-paper.pdf?la=en

…thus limiting the ability of policymakers to fight the next recession. Whether new fiscal stimulus programs would be jeopardized by these already heavy public debt burdens is a central question. For a sample of developed countries, we find that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness. Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study. Even in countries with high public debt, the penalty for activist discretionary fiscal policy appears to be small.