The Fiscal Multiplier and Economic Policy Analysis in the United States

Abstract

The Great Recession sparked wide interest in the economic effects of fiscal policy. That interest is reflected in an ongoing debate over the size of the fiscal multiplier. This survey article addresses three questions: What models do economists use to estimate that multiplier? Why do estimates of it vary widely? How can economists use those estimates to judiciously analyze U.S. economic policy? (JEL E62, H30, H50)

The Global Role of the U.S. Economy: Linkages, Policies and Spillovers

“…Fiscal multipliers-the additional output generated by an additional U.S. dollar of government spending or tax cut-depend on the presence of economic slack, the reaction of monetary policy, and the nature of the fiscal measures (Laforte and Roberts 2014;Brayton, Laubach, and Reifschneider 2014;Whalen and Reichling 2015). In particular, fiscal stimulus measures could be expected to have different effects if they take the form of tax cuts or measures to bolster government spending and infrastructure investment.…”

“…The short-term fiscal multiplier associated with corporate tax cuts is generally estimated to be below one, although considerable uncertainty surrounds these estimates (Chahrour, Schmitt-Grohé, and Uribe 2012;Ljungqvist and Smolyansky 2016;Whalen and Reichling 2015). Regarding personal income tax cuts, empirical studies find that fiscal multipliers vary considerably, from 0.3 and 1.5 (Whalen and Reichling 2015).…”

“…Regarding personal income tax cuts, empirical studies find that fiscal multipliers vary considerably, from 0.3 and 1.5 (Whalen and Reichling 2015). The effect on growth depends notably on the structure of the tax cuts and as well as the way in which they are financed (Gale and Samwick 2016;Zidar 2015).…”

“…Public infrastructure spending is generally estimated to have larger short-term effects on U.S. activity, with fiscal multiplier comprised between 0.4 and 2.2 (Auerbach and Gorodnichenko 2012;Bivens 2014;Whalen and Reichling 2015). This reflects the direct impact of public investment on aggregate demand, a relatively low import content of infrastructure spending and positive effects on private investment and productivity.…”

A Comprehensive Assessment of Four Options for Financing Health Care Delivery in Oregon

“…That increase in consumption, in turn, leads to an increase in employment. It is important to note that the magnitudes of these projected changes in GSP and employment have a higher degree of uncertainty than other projections (see Whalen and Reichling, 2015).…”