Fiscal Policy in the United States: Automatic Stabilizers, Discretionary Fiscal Policy Actions, and the Economy

43 Pages Posted: 27 Jul 2011

See all articles by Glenn R. Follette

Glenn R. Follette

Federal Reserve Board - Division of Research and Statistics

Byron F. Lutz

Federal Reserve Board - Research Division

Multiple version iconThere are 3 versions of this paper

Date Written: June 28, 2010

Abstract

We examine the effects of the economy on the government budget as well as the effects of the budget on the economy. First, we provide measures of the effects of automatic stabilizers on budget outcomes at the federal and state and local levels. For the federal government, the deficit increases about 0.35 percent of GDP for each 1 percentage point deviation of actual GDP relative to potential GDP. For state and local governments, the deficit increases by about 0.1 percent of GDP. We then examine the response of the economy to the automatic stabilizers using the FRB/US model by comparing the response to aggregate demand shocks under two scenarios: with the automatic stabilizers in place and without the automatic stabilizers. Second, we provide measures of discretionary fiscal policy actions at the federal and state and local levels. We find that federal policy actions are somewhat counter-cyclical while state and local policy actions have been somewhat pro-cyclical. Finally, we evaluate the impact of the budget, from both automatic stabilizers and discretionary actions, on economic activity in 2008 and 2009.

Keywords: Fiscal policy, automatic stabilizers

JEL Classification: E62, H60, H70

Suggested Citation

Follette, Glenn R. and Lutz, Byron F., Fiscal Policy in the United States: Automatic Stabilizers, Discretionary Fiscal Policy Actions, and the Economy (June 28, 2010). FEDS Working Paper No. 2010-43. Available at SSRN: https://ssrn.com/abstract=1895520 or http://dx.doi.org/10.2139/ssrn.1895520

Glenn R. Follette

Federal Reserve Board - Division of Research and Statistics ( email )

Washington, DC 20551
United States

Byron F. Lutz (Contact Author)

Federal Reserve Board - Research Division ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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