Measuring the Output Responses to Fiscal Policy
52 Pages Posted: 29 Aug 2010
Date Written: August 28, 2010
A key issue in current research and policy is the size of fiscal multipliers when the economy is in recession. Using a variety of methods and data sources, we provide three insights. First, using regime-switching models, we estimate effects of tax and spending policies that can vary over the business cycle; we find large differences in the size of fiscal 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 in relation 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.
Keywords: Fiscal Multiplier, Business Cycles
JEL Classification: C32, E32, E62
Suggested Citation: Suggested Citation