Research Briefing | Apr 14, 2021

Global | Overheating risk is real, but probably overstated

Overheating risk is real, but probably overstated - iPad

Could fiscal stimulus lead to economic overheating? Our assessment suggests that while that’s a risk, it’s not a foregone conclusion, even with large fiscal packages. There are also arguments for erring on the side of more stimulus rather than less, with policy options to rein in demand quickly if inflationary pressures start to pick up.

What you will learn:

  • Multipliers are also likely to be low for other stimulus
    categories too, including aid to businesses (well below 1
    according to the Congressional Budget Office).
  • An important component of the argument for overheating is the existence of a large overhang of “excess” savings built up in 2020 due to coronavirus restrictions.
  • A key determinant of whether a fiscal package risks overheating an economy is, in theory, the size of the output gap (the difference between actual output and its potential level).

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