Fiscal Stimulus Is/Was More Powerful Than Many Think.

Is this why the stock market refuses to go down? Also why the economy is seemingly so indifferent to the Fed’s rate-raising campaign? It is probably at least part of the puzzle.

Paper is a very quick read – by Economists from Stanford, Northwestern, and Harvard.

conventional wisdom… [argues] the effect of excess savings will dissipate in a few quarters. By contrast, our benchmark scenario suggests that these effects will stick around for roughly 5 years. These numbers are larger if MPCs [Marginal Propensity to Consume] are lower, and are robust to plausible alternative calibrations.

  • Rational expectations about the future boom make the response much larger on impact due to current spending out of anticipated income, which turns out to speed up the trickling up process.
  • Tight monetary policy, on the other hand, also speeds up trickling up, but it does so by mitigating the effects of excess savings on demand.

In either case, however, the duration of excess savings and output remains more than twice as long as the conventional wisdom suggests.

FYI the paper (and the draft post) is from March – so a little late but…

Click to access tricklingup.pdf

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