Austerity versus stimulus: the polarizing effect of fiscal policy

McManus, R. (2015) Austerity versus stimulus: the polarizing effect of fiscal policy. Oxford Economics Papers. ISSN 0030-7653.


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Through constructing a New-Keynesian DSGE model with heterogeneous agents, this paper investigates both the aggregate and distributional consequences of fiscal policy. Polarized preferences over the conduct of fiscal policy emerge between those agents who participate in credit markets and those who do not. Exogenous shocks impact the two types of agent differently, and, as a result, fiscal policy responses to these shocks produce minimal aggregate welfare effects as the gains of one agent are matched by the losses of another. There is, therefore, a normative justication for countercyclical fiscal policy, but on redistributive rather than stabilisation grounds.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social and Applied Sciences > The Business School
Depositing User: Richard McManus
Date Deposited: 27 Apr 2015 08:56
Last Modified: 22 May 2017 15:58

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Last edited: 29/06/2016 12:23:00