Policy Article

The Effects of Government Spending in a Growing Economy

Kiel Policy Briefs

In response to the recent global recession triggered by the financial crisis of 2007, many governments have adopted fiscal stimulus packages. The intervention has again prompted academic and policy debates on the effects of fiscal policy on macroeconomic key aggregates. The author Mewael F. Tesfaselassie analyses how the effects of government spending are influenced by the long-term growth of an economy. His main finding is: An increase in government spending is more inflationary in an economy with higher long-term growth than one with lower long-term growth. While the increase in output and consumption are smaller initially the effects are more persistent the higher long-term growth is.

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