When is the Fiscal Multiplier High? A Comparison of Four Business Cycle Phases
32 Pages Posted: 18 May 2020
Date Written: March 27, 2020
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: Suggested Citation