Federal Reserve Bank of St. Louis Review | 2010
Authors:
DOI: 10.20955/r.92.121-128
Journal: Federal Reserve Bank of St. Louis Review
Year: 2010
Publisher: Federal Reserve Bank of St.Louis
Document Type: Article
Open Access: All Open Access; Gold Open Access
Cited by: 1
Proponents of fiscal stimulus argue that government spending is needed to replace the private spending normally lost during a recession. Estimates of the so-called fiscal multiplier based on wartime episodes are used to support the proposition that a peacetime intervention can "stimulate" the economy in a desirable manner. The author argues that a wartime crisis is fundamentally different from a peacetime economic crisis. What may be desirable in war is not necessarily so in peace. This is demonstrated formally in the context of a simple neoclassical model, which delivers fiscal multipliers consistent with the wartime evidence. The optimal fiscal policy, whether it entails expansion or contraction, is independent of the size of the fiscal multiplier. © 2010, The Federal Reserve Bank of St. Louis.