Balanced-Budget Fiscal Stimuli of Investment and Welfare Value

Is a fiscal stimulus of investment a viable complement to, or substitute for, monetary policy? The authors of this working paper show that, under a balanced-budget stimulus, investment acceleration may come at the expense of decreased total welfare and that where uncertainty is higher about private returns a net efficiency loss is more likely. However, the risk of such negative outcome strongly declines when the government spending is balanced by taxing both private and public returns on investment.