The Dark Side of Fiscal Stimulus

The output multiplier turns negative before a deficit spending program expires.We show the generality of this unpleasant finding for the standard real business cyclemodel. We then calibrate an extended model for the US and demonstrate how fiscalstimulus slows down economic recovery from recession in the medium-run. We discuss theslowdown from recovery w.r.t. alternative assumptions about the size and persistence of theinitial shock (severity of the recession), the assumed power of the impact multiplier, and thescale and duration of the stimulus program. We also show that results are quantitativelyvery similar independent from whether a recession was caused by an efficiency wedge(input-financing frictions) or a labor wedge (labor market frictions)...