Demand expectations and the timing of stimulus policies

Available from: 
October 2013
Paper author(s): 
Caio Machado (São Paulo School of Economics)
Bernardo Guimaraes (Sao Paulo School of Economics)
Macroeconomics - Economic growth - Monetary Policy

This paper proposes a simple macroeconomic model with staggered investment decisions. The expected return from investing depends on demand expectations, which are pinned down by fundamentals and history. Owing to an aggregate demand externality, investment subsidies can improve welfare in this economy. The model can be used to address questions concerning the timing of stimulus policies: should the government spend more on preventing the economy from falling into a recession or on rescuing the economy when productivity picks up? Results show the government should strike a balance between both objectives.


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Research section: 
Lacea 2013 annual meeting
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