Saturday, September 7, 2013

Just when you thought it was safe... go all Keynesian again, along comes the shark patrol--Christiane Nickel and Andreas Tudyka--to say, No,'s dangerous waters out there;
Our results indicate that the private sector increasingly internalises the government budget constraint as the degree of indebtedness rises. This qualifies debt as an important variable to watch when thinking about the impact of fiscal stimulus.
  • In particular, while fiscal stimuli exert expansionary effects on macroeconomic activity at low debt-to-GDP ratios, the overall effect on real GDP becomes less positive or even negative points at higher debt-to-GDP ratios.
  • Depending on which debt scenario we examine, our results accommodate the inconclusive results of previous studies, which either document positively correlated or divergent behaviour of government activity and the trade balance or the current account.
In sum, our findings lead us to conclude that the contradictory findings of previous studies may be the result of estimation within a static debt regime when indeed the debt regime is dynamic.
Can anyone guess what the magic number is?
...the shock [from fiscal stimulus] initially provides stimulus but this can turn into a contractionary force as time passes.
  • ....
Eventually, at debt ratios beyond 90%, the overall effect on real GDP becomes significantly negative  
Ball..your court, Paul.

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