The Impact of Fiscal Policy on Economic Activity Over the Business Cycle - Evidence from a Threshold VAR Analysis

By Anja Baum, G. Koester. Social Science Research Network, 2011

173 citations recorded by the source corpus.

Does the state of the business cycle matter for the effects of fiscal policy shocks on GDP? This study analyses quarterly German data from 1976 to 2009 in a threshold SVAR, expanding the SVAR approach by Blanchard and Perotti (2002). In a linear benchmark SVAR, the analysis finds that hiking spending yields a short-term fiscal multiplier of around 0.70, while the fiscal multiplier resulting from an increase in taxes and social security contributions is -0.66. In addition, the threshold model derives fundamentally new insights on the effects of shocks, depending on when in the business cycle they occur, their size and their direction. Most importantly, fiscal spending multipliers are much larger in times of a negative output gap but have only a very limited effect in times of a positive output gap. Discretionary revenue policies, on the other hand, have a generally more limited impact. Our findings have important implications for the optimal fiscal policy mix over different stages of the business cycle. Various robustness checks, including a different threshold specification, do not influence these implications substantially.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/2a79ad7ef0630f428d930bdc3e4c8acec92c0f2a

How researchers see this paper

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In Economics and Econometrics

1. A. Weber
2. Marcos Poplawski-Ribeiro
3. Anja Baum

Citations in the corpus

• Successful Austerity in the United States, Europe and Japan (2012, unknown): “Similar approaches have recently been adopted also by Calza and Sousa (2006), Afonso et al. (2011) and Baum and Koester (2011).”
• Fiscal Multipliers and the State of the Economy (2012, methodology): “The one-sided Hodrick-Prescott (HP)-filter could potentially be applied to update the trend, as done in Baum and Koester (2011), but this yields very little precision along the boundaries.”
• State-dependent effects of fiscal policy (2014, unknown): “Three exceptions are Candelon and Lieb (2013), Baum and Koester (2011), and Baum et al.”