Munich Personal RePEc Archive
Should a Government Fiscally Intervene
in a Recession and, If So, How?
Harashima, Taiji
Kanazawa Seiryo University
2 April 2017
Online at https://mpra.ub.uni-muenchen.de/78053/
MPRA Paper No. 78053, posted 31 Mar 2017 09:03 UTC
Should a Government Fiscally Intervene in a Recession and, If So, How?
Taiji HARASHIMA*
April, 2017
Abstract
The validity of discretionary fiscal policy in a recession will differ according to the cause and
mechanism of recession. In this paper, discretionary fiscal policy in a recession caused by a
fundamental shock that changes the steady state downwards is examined. In such a recession,
households need to discontinuously increase consumption to a point on the saddle path to
maintain Pareto efficiency. However, they will not jump consumption in this manner and instead will choose a Nash equilibrium of a Pareto inefficient path because they dislike unsmooth and discontinuous consumption and behave strategically. The paper concludes that
increasing government consumption until demand meets the present level of production and
maintaining this fiscal policy for a long period is the best option. Consequent government debts
can be sustainable even if they become extremely large.
JEL Classification code: E20, E32, E62, H20, H30, H63
Keywords: Discretionary Fiscal policy; Recession; Government consumption; Government1. Review the first 13 pages of the attached paper which discusses the effect of government intervention on recessions.
2. Locate two JOURNAL articles which discuss this topic further. You need to focus on the Abstract, Introduction, Results, and Conclusion. For our purposes, you are not expected to fully understand the Data and Methodology.
3. Summarize these journal articles. Please use your own words. No copy-and-paste. Cite your sources.
4. Write minimum of 3 pages.
5. Please post (in APA format) your article citation.
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