Measuring the Output Responses to Fiscal Policy

Abstract

A key issue in current research and policy is the size of fiscal multipliers when the economy is in recession. We provide three insights. First, using regime-switching models, we find large differences in the size of spending multipliers in recessions and expansions with fiscal policy being considerably more effective in recessions than in expansions. Second, we estimate multipliers for more disaggregate spending variables which behave differently relative to aggregate fiscal policy shocks, with military spending having the largest multiplier. Third, we show that controlling for predictable components of fiscal shocks tends to increase the size of the multipliers in recessions.

Fiscal policy, pricing frictions and monetary accommodation

“…Interestingly, the role of fiscal policy in the US during recessions is rather small: the per-capita output multiplier we generate in this situation is among the smallest of all we obtain. This conclusion should be compared with those of Auerbach and Gorodnichenko (2010) who, employ a different technique, and find that fiscal policy has quite different effects in recessions and expansions.…”

“…Auerbach and Gorodnichenko (2010) have studied the effects of fiscal policy in recessions and expansions and found that they are different. Kirchner et al (2010) also study whether the state of the economy affects the nature of the transmission of fiscal shocks.…”

Fiscal multipliers in a structural VEC model with mixed normal errors

“…whether government …scal stimulus is more e¤ective when it is used to supplement scant private demand in an economic downturn than in an upturn (Auerbach & Gorodnichenko 2012, Caggiano, Castelnuovo, Colombo & Nodari, 2015. Interestingly Caggiano et al (2015) show that this indeed is the case with deep recessions and extreme economic peaks in the US, while no statistically signi…cant di¤erences between normal times, i.e.…”

“…The data cover the period 1981Q3 to 2012Q4 and were previously used by Caggiano et al (2015), as well as Auerbach and Gorodnichenko (2012). Similarly to Caggiano et al (2015), …scal policy anticipation e¤ects, or foresight are addressed by including the …scal news variable proposed by Gambetti (2012).…”

“…Fiscal policy research has relied on four identi…cation strategies: 1) the recursive approach due to Sims (1980) applied to …scal policy by e.g. Auerbach and Gorodnichenko (2012), 2) the frequently applied structural VAR proposed by Blancard and Perotti (2002), 3) the sign restrictions developed by Uhlig (2005) and applied by Mountford and Uhlig (2009) and 4) the narrative approach introduced by Ramey and Shapiro (1998), where unexpected increases in military spending are exploited.…”