Daily Management Review

Researchers Say Even When Debt Is High, Fiscal Stimulus In Downturns Is Safe


08/27/2017




Researchers Say Even When Debt Is High, Fiscal Stimulus In Downturns Is Safe
Researchers told an influential group of central bankers in Jackson, Wyoming, on Saturday that even if the debt of a country is already quite large, government spending in a recession can boost a country’s economy without permanently bloating its public debt.
 
“Expansionary fiscal policies adopted when the economy is weak may not only stimulate output but also reduce debt-to-GDP ratios,” University of California, Berkeley, professors Alan Auerbach and Yuriy Gorodnichenko said in a paper presented at the Kansas City Federal Reserve’s annual economic symposium.
 
How best to foster a stronger global economy is the primary focus of the symposium this year.
 
In a tactic that economists now think may have slowed recovery, government spending was retracted back by the governments and fiscal authorities of some countries due to fear of ballooning public debt after the 2007-2009 global financial crisis.
 
However, policymakers worry about the drag on growth for many countries where debt levels have become high by historical standards in many such countries and includes the lies of the United States where debt is about 76 percent of the nation’s output.
 
Evidence that effective even in heavily indebted countries, fiscal stimulus in a recession can also be safe, was put forward by the research which was presented on Saturday.
 
And given existing low interest rates and low inflation rates in their economies, for a number of central bankers who face limited options of their own to combat a future downturn, including Federal Reserve Chair Janet Yellen and European Central Bank chief Mario Draghi, that may be particularly welcome news.
 
Kin the United States, Treasury Secretary Stephen Mnuchin warning that unless Congress lifts the country’s debt ceiling by Sept. 29 the government will no longer be able to pay its bills and following this politicians in Washington are preparing for a potential showdown over U.S. debt next month. In order to restrict government spending, Republicans have tried to use past debt ceiling debates as leverage.
 
Fiscal stimulus when an economy is strong can indeed add to debt burdens and slow long-run growth, the University of California researchers warned in their paper.
 
“Our results should not be interpreted as an unconditional call for an aggressive government spending in response to a deteriorating economy,” they wrote.
 
Still, evidence that fiscal spending during a downturn has less risk of downside than is often thought was present, they argued.
 
"With tight constraints on central banks, one may expect -- or maybe hope for -- a more active response of fiscal policy when the next recession arrives," they wrote.
 
(Source:www.reuters.com) 






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