Fiscal Policy and Aggregate Demand in the U.S. Before, During and Following the Great Recession

48 Pages Posted: 5 Jun 2017

See all articles by David B. Cashin

David B. Cashin

Board of Governors of the Federal Reserve System

Jamie Lenney

Board of Governors of the Federal Reserve System

Byron F. Lutz

Board of Governors of the Federal Reserve System

William Peterman

Board of Governors of the Federal Reserve System

Date Written: 2017-06

Abstract

We examine the effect of federal and subnational fiscal policy on aggregate demand in the U.S. by introducing the fiscal effect (FE) measure. FE can be decomposed into three components. Discretionary FE quantifies the effect of discretionary or legislated policy changes on aggregate demand. Cyclical FE captures the effect of the automatic stabilizers--changes in government taxes and spending arising from the business cycle. Residual FE measures the effect of all changes in government revenues and outlays which cannot be categorized as either discretionary or cyclical; for example, it captures the effect of the secular increase in entitlement program spending due to the aging of the population. We use FE to examine the contribution of fiscal policy to growth in real GDP over the course of the Great Recession and current expansion. We compare this contribution to the contributions to growth in aggregate demand made by fiscal policy over past business cycles. In doing so, we highlight that the relatively strong support of government policy to GDP growth during the Great Recession was followed by a historically weak contribution over the course of the current expansion.

Keywords: Fiscal policy, Great Recession, Multipliers, Public debt and national budget, Public economics, Taxation, Automatic stabilizers

Suggested Citation

Cashin, David B. and Lenney, Jamie and Lutz, Byron F. and Peterman, William, Fiscal Policy and Aggregate Demand in the U.S. Before, During and Following the Great Recession (2017-06). FEDS Working Paper No. 2017-061, Available at SSRN: https://ssrn.com/abstract=2980045 or http://dx.doi.org/10.17016/FEDS.2017.061

David B. Cashin (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Jamie Lenney

Board of Governors of the Federal Reserve System

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

Byron F. Lutz

Board of Governors of the Federal Reserve System ( email )

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

William Peterman

Board of Governors of the Federal Reserve System ( email )

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

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