Rapport till Finanspolitiska rådet 
                                                  2008/2 
                                                        
                              A survey of the effects of  
                                                                                *
                             discretionary fiscal policy  
                                             Roel Beetsma 
                        University of Amsterdam, CEPR and CESifo 
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                  The views expressed in this report are those of the author and do not necessarily represent those of the 
                  Swedish Fiscal Policy Council.  
                                                                   
                  *
                   I thank, for helpful comments, my discussant Lars E.O. Svensson, as well as Lars Calmfors and par-
                  ticipants at the conference “Fiscal Policy and Labour Market Reforms”, organized by the Swedish Fiscal 
                  Policy Council in Stockholm, 29 January, 2008. 
                  Finanspolitiska rådet är en myndighet som har till uppgift att göra en obe-
                  roende granskning av regeringens finanspolitik. Rådets uppgifter fullföljs 
                  framför allt genom publiceringen av rapporten Svensk finanspolitik som 
                  lämnas till regeringen en gång per år. Rapporten ska kunna användas som 
                  ett underlag för riksdagens granskning av regeringens politik. Rådet anord-
                  nar även konferenser. I serien Studier i finanspolitik publiceras fördjupa-
                  de studier av olika aspekter på finanspolitiken. 
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                  Finanspolitiska rådet 
                  Box 3273 
                  SE-103 65 Stockholm 
                  Kungsgatan 12-14 
                  Tel: 08-453 59 90  
                  Fax: 08-453 59 64 
                  info@finanspolitiskaradet.se 
                  www.finanspolitiskaradet.se 
                   
                   
                   
                  ISSN 1654-8000 
                                                                         3 
             Abstract 
             Discretionary fiscal policy is undergoing a revival. Recently, the US govern-
             ment has implemented a fiscal stimulus package. Also, prominent economists 
             and the IMF are pleading in favour of fiscal stimulus. In this paper we survey 
             the theoretical and empirical literature on the effects of discretionary fiscal 
             policy changes through taxes and government spending. We also provide some 
             of our own evidence. Most empirical evidence indicates that a fiscal expansion 
             raises output and consumption and deteriorates the trade balance. Our own 
             evidence, though, suggests that the stimulating effect is weaker and the trade 
             balance deterioration is larger for more open economies. Keynesian-type mod-
             els with imperfections such as for example credit restrictions seem most in 
             accordance with the empirical evidence. Does this imply that an active fiscal 
             stabilisation policy is desirable? Certainly not: there exists substantial uncer-
             tainty about the size of the effects of fiscal policy, the long-run cost of a short-
             run expansion may be high, a government spending increase aimed at stabilisa-
             tion may be wasteful or create long-term obligations, there exists uncertainty 
             about the state of the economy and there is a substantial time lag before a pol-
             icy change is implemented. It is best to impose credible fiscal restrictions and 
             have fiscal policy focus on medium-term balance or surplus, leaving enough 
             room for the automatic stabilisers to do their work. That leaves monetary pol-
             icy free to pursue price stability and stabilize the economy.