When is the Fiscal Multiplier High? A Comparison of Four Business Cycle Phases

32 Pages Posted: 18 May 2020

See all articles by Travis J. Berge

Travis J. Berge

Board of Governors of the Federal Reserve System

Maarten De Ridder

University of Cambridge

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: March 27, 2020

Abstract

We synthesize the recent, at times conflicting, empirical literature regarding whether fiscal policy is more effective during certain points in the business cycle. Evidence of state dependence in the multiplier depends critically on how the business cycle is defined. Estimates of the fiscal multiplier do not change when the unemployment rate is above or below its trend. However, we find that the multiplier is higher when the unemployment rate is increasing relative to when it is decreasing. This result holds using both a long time-series at the U.S. national level and for a panel of U.S. states.

Keywords: Fiscal multiplier; Countercyclical policy; Cross-sectional analysis; Local projections

JEL Classification: E62; C31; C32

Suggested Citation

Berge, Travis J. and De Ridder, Maarten and Pfajfar, Damjan, When is the Fiscal Multiplier High? A Comparison of Four Business Cycle Phases (March 27, 2020). FEDS Working Paper No. 2020-026 https://doi.org/10.17016/FEDS.2020.026 , Available at SSRN: https://ssrn.com/abstract=3601287

Travis J. Berge (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Maarten De Ridder

University of Cambridge ( email )

Cambridge
United Kingdom

Damjan Pfajfar

Board of Governors of the Federal Reserve System ( email )

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

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