In the Long Run, the Multiplier is Dead: Lessons from a Simulation

Abstract

This paper re-examines the significance of the fiscal multiplier from an inter-temporal perspective using simulation results derived from a standard overlapping-generations framework. It reveals that even if fiscal stimulus in the form of extra public consumption spending is assumed to increased output and employment in the short run, the negative medium to long-term consequences of the stimulus will ultimately exceed, in present-value terms, the short-term macroeconomic benefits of that stimulus. This is due to the interest rate and tax effects of the stimulus-induced budget deficit which lowers future private investment, household consumption, and labour supply.