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Chapter 1 of the April 2010 World Economic Outlook describes recent output performance. Freedman and others (2010) provide estimates of multipliers under a wide range of assumptions.
Reduced fiscal space has already had material consequences. In 2009, high government deficit and debt ratios prevented some smaller economies from enacting fiscal stimulus–e.g. the emerging Eastern European economies.
AS comprises China, Hong Kong S.A.R. of China, India, Indonesia, Korea,Malaysia, Philippines, Singapore, and Thailand.
We follow Galí, López-Salido and Vallés (2007) in referring to these households as liquidity-constrained. Other terms used in the literature are rule-of-thumb or hand-to-mouth agents.
Because banks are assumed to have zero net worth, this equals the value of their loans to nontradables and tradables proucers.
We assume that turnover in the population is large enough that the receipts of the insurers exactly equal their payouts.
It is important to re-emphasize that these are stylized simulations that have been normalized to a one percentage point cut in the deficit-to-GDP ratio in the United States and Japan, and proportionately smaller cuts elsewhere.