Fiscal and Monetary Policy during Downturns: Evidence from the G7

23 Pages Posted: 23 Mar 2009

See all articles by Daniel Leigh

Daniel Leigh

International Monetary Fund (IMF)

Sven Jari Stehn

Brasenose College; International Monetary Fund (IMF)

Date Written: March 2009

Abstract

This paper analyzes how fiscal and monetary policy typically respond during downturns in G7 countries. It evaluates whether discretionary fiscal responses to downturns are timely and temporary, and compares the response of fiscal policy to that of monetary policy. The results suggest that while responding more weakly and less quickly than monetary policy, discretionary fiscal policy is more timely than conventional wisdom would suggest, particularly in "Anglo-Saxon" countries, but the response differs substantially across fiscal instruments. Both fiscal and monetary policy are found to be subject to an easing bias, with more easing during downturns than tightening during upturns; and liable to easing in response to erroneously perceived downturns, many of which are subsequently revised to expansions.

Keywords: Fiscal stabilization, government revenue, government expenditure

JEL Classification: E62, E63, H50

Suggested Citation

Leigh, Daniel and Stehn, Sven Jari, Fiscal and Monetary Policy during Downturns: Evidence from the G7 (March 2009). IMF Working Papers, Vol. , pp. 1-21, 2009. Available at SSRN: https://ssrn.com/abstract=1366180

Daniel Leigh (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sven Jari Stehn

Brasenose College ( email )

Oxford OX1 4AJ
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

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