Break the taboo: boost aggregate demand without increasing debt

Seidman, LaurenceThe economy of the United States experienced a slow recovery from the 2008 crisis despite the fact that the Fed had kept interest rate at zero for almost six years and taken three rounds of quantitative easing. Conventional macroeconomic policies have not been able to restore the economy to its potential growth track. This dissertation studies a “stimulus-without-debt” approach, which can be used to combat future severe recessions. This approach consists of two component: a standard fiscal stimulus (tax rebates or increase in government spending) and a transfer from the central bank to the treasury of the same size of the fiscal stimulus. A dynamic AD-AS model is built to estimate the effectiveness of this approach. Parameters of the model are carefully calibrated and the fiscal multiplier is estimated using a Markov-switching VAR method. The estimated fiscal multiplier falls in the range of 1.5-2.5 in a recession, and the model simulation results show that the “stimulus-without-debt” approach can significantly reduce the government's debt burden while boosting the economy to close the output gap in a short time. Some potential issues related to this policy are also discussed.University of Delaware, Department of EconomicsPh.D