Carlos J. García , Wildo González , Gabriel Valenzuela
{"title":"The valuation of economic recovery: The case for investment-led fiscal spending policies in open economies","authors":"Carlos J. García , Wildo González , Gabriel Valenzuela","doi":"10.1016/j.iref.2025.104013","DOIUrl":null,"url":null,"abstract":"<div><div>We show quantitatively that an expansionary fiscal policy that takes into account future debt can be a valid tool to stabilize open economies subject to rare but severe shocks in a context of flexible exchange rates and capital flows. We assume that fiscal spending is directed towards investment to boost private spending, and that neoclassical preferences are replaced by preferences in which households also value economic recovery after a severe shock (preferences based on learning experience). Taken together, these seemingly unrelated conditions allow expansionary fiscal policy to induce a genuine recovery in the economy and to outperform some cases of expansionary monetary policy in terms of welfare. The mechanism is simple: investment-oriented fiscal spending, which ensures a faster recovery, is valued by households and thus stimulates consumption in a virtuous circle. Thus, a faster recovery based on investment-oriented fiscal spending is preferable to targets such as inflation and/or debt, which can still be maintained, but to preserve long-term stability.</div></div>","PeriodicalId":14444,"journal":{"name":"International Review of Economics & Finance","volume":"99 ","pages":"Article 104013"},"PeriodicalIF":4.8000,"publicationDate":"2025-03-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Review of Economics & Finance","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1059056025001765","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
We show quantitatively that an expansionary fiscal policy that takes into account future debt can be a valid tool to stabilize open economies subject to rare but severe shocks in a context of flexible exchange rates and capital flows. We assume that fiscal spending is directed towards investment to boost private spending, and that neoclassical preferences are replaced by preferences in which households also value economic recovery after a severe shock (preferences based on learning experience). Taken together, these seemingly unrelated conditions allow expansionary fiscal policy to induce a genuine recovery in the economy and to outperform some cases of expansionary monetary policy in terms of welfare. The mechanism is simple: investment-oriented fiscal spending, which ensures a faster recovery, is valued by households and thus stimulates consumption in a virtuous circle. Thus, a faster recovery based on investment-oriented fiscal spending is preferable to targets such as inflation and/or debt, which can still be maintained, but to preserve long-term stability.
期刊介绍:
The International Review of Economics & Finance (IREF) is a scholarly journal devoted to the publication of high quality theoretical and empirical articles in all areas of international economics, macroeconomics and financial economics. Contributions that facilitate the communications between the real and the financial sectors of the economy are of particular interest.