Fiscal Stimulus and Firms: A Tale of Two Recessions

67 Pages Posted: 23 Feb 2016

See all articles by Christine Dobridge

Christine Dobridge

Board of Governors of the Federal Reserve System

Date Written: 2016-02-22


In this paper, I examine the effects of a countercyclical fiscal policy that gave firms additional tax refunds -- additional liquidity -- at the end of the past two recessions. I take advantage of a discontinuity in the slope of the tax refund formula to estimate the policy's impact. I find that after passage of the policy in 2002, firms allocated $0.40 of every tax refund dollar to investment. After passage of the policy in 2009, in contrast, firms used the refunds to increase cash holdings ($0.96 of every refund dollar) before paying down debt in the following year. I provide evidence that differences in macroeconomic conditions across the two periods drove these differences in firm responses, illustrating how the effects of stimulus vary across recessionary states of the world. I also show that while the policy had no discernable effect on investment in the most recent recessionary period, it did reduce firms’ bankruptcy risk and the probability of a future credit- rating downgrade.

Keywords: Financing policy, fiscal policy, fixed investment, taxation

Suggested Citation

Dobridge, Christine, Fiscal Stimulus and Firms: A Tale of Two Recessions (2016-02-22). FEDS Working Paper No. 2016-13, Available at SSRN: or

Christine Dobridge (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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