Speaker: Timo Trimborn, Assistant Professor, University of Göttingen
Venue: Rm. 614, SE Building
Time: 16:00-17:30, Sept. 11, 2013

Most of the discussion about fiscal stimulus focuses on the multiplier of government
spending on impact. In this paper we shift the focus to the multiplier at the end,
i.e. to the period in which a deficit spending program terminates. We show that recent
time series analyses as well as economic models of different schools of thought predict that
the multiplier turns negative before spending expires. This means that aggregate output
at the time of expiry of fiscal stimulus is predicted to be lower than it could be without
deficit spending. We set up a simple model that explains this phenomenon. Using phase
diagram analysis we prove that the aggregate capital stock at the time of expiry of fiscal
stimulus is lower than it would be without the deficit spending program. This fact explains
why aggregate output is below its laissez faire level as well. We then calibrate an extended
version of the model for the US and demonstrate how fiscal stimulus slows down recovery
from a recession in the medium-run.