Measuring the Output Responses to Fiscal Policy

52 Pages Posted: 29 Aug 2010  

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

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Date Written: August 28, 2010

Abstract

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

Auerbach, Alan J. and Gorodnichenko, Yuriy, Measuring the Output Responses to Fiscal Policy (August 28, 2010). Available at SSRN: https://ssrn.com/abstract=1667585 or http://dx.doi.org/10.2139/ssrn.1667585

Alan Jeffrey Auerbach

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-0711 (Phone)
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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Munich, DE-81679
Germany

Yuriy Gorodnichenko (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://www.econ.berkeley.edu/~ygorodni/index.htm

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

IZA Institute of Labor Economics

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Bonn, D-53072
Germany

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