Exercises for Stimulating Economic Activity through Public Spending: A Case Study for Mexico

The government plays a crucial role in stimulating economic activity, especially during recessions. However, implementing countercyclical fiscal policies often results in a significant increase in public debt. In this study, we propose an alternative to boost economic activity without compromising sovereign debt. We use an NK- DSGE model to analyze disaggregated spending in the Mexican economy and calculate the multipliers for each component individually. Our proposal involves increasing expenditure in the component with the highest multiplier, offset by cuts in the least impactful one, thus not affecting the government budget. We conclude that this approach is optimal for stimulating the economy and achieving fiscal consolidation.