Measuring the Output Responses to Fiscal Policy

By M. Szudejko. 2012

1,993 citations recorded by the source corpus.

A key issue in current research and policy is the size of fiscal multipliers when the economy is in recession. We provide three insights. First, using regime-switching models, we find large differences in the size of spending multipliers in recessions and expansions with fiscal policy being considerably more effective in recessions than in expansions. Second, we estimate multipliers for more disaggregate spending variables which behave differently relative to aggregate fiscal policy shocks, with military spending having the largest multiplier. Third, we show that controlling for predictable components of fiscal shocks tends to increase the size of the multipliers in recessions. 1 Auerbach, Department of Economics, 508-1 Evans Hall, University of California, Berkeley, CA 94720-3880 and National Bureau of Economic Research (email: auerbach@econ.berkeley.edu); Gorodnichenko, Department of Economics, 693 Evans Hall, University of California, Berkeley, CA 94720-3880 and National Bureau of Economic Research (email: ygorodni@econ.berkeley.edu). This paper was presented at the NBER TAPES conference on Fiscal Policy, Varenna, June 14-16, 2010. We are grateful to Olivier Coibion, Lorenz Kueng, Alex Michaelides, Roberto Perotti, participants in the UC Berkeley Departmental Seminar and the NBER/IGIER TAPES conference and two anonymous referees for suggestions and comments on earlier drafts. The impact of fiscal policy on output and its components has long been a central part of fiscal policy analysis. But, as has been made clear by the recent debate over the likely effects and desired composition of fiscal stimulus in the United States and abroad, there remains an enormous range of views over the strength of fiscal policy’s macroeconomic effects, the channels through which these effects are transmitted, and the variations in these effects and channels with respect to economic conditions. In particular, the central issue is the size of fiscal multipliers when the economy is in recession. The gist of the recent literature on this issue has effectively been to echo earlier Keynesian arguments that government spending is likely to have larger expansionary effects in recessions than in expansions. Intuitively, when the economy has slack, expansionary government spending shocks are less likely to crowd out private consumption or investment. To the extent discretionary fiscal policy is heavily used in recessions to stimulate aggregate demand, the key empirical question is how the effects of fiscal shocks vary over the business cycle. The answer to this question is not only interesting to policymakers in designing stabilization strategies but it can also help the economics profession to reconcile conflicting predictions about the effects of fiscal shocks across different types of macroeconomic models. Despite these important theoretical insights and strong demand by the policy process for estimates of fiscal multipliers, there is little empirical research trying to assess how the size of fiscal multiplies varies over the business cycle. In part, this dearth of evidence reflects the fact that much of empirical research in this area is based on linear structural vector autoregressions (SVARs) or linearized dynamic stochastic general equilibrium (DSGE) models which by 1 We are aware only of Athanasios Tagkalakis (2008), who uses annual data for a panel of OECD economies to study the effects of fiscal policy on consumption in expansions and recessions.

Subfields: Economics and Econometrics

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Citations in the corpus

Estimating Fiscal Multipliers: News From A Non‐linear World (2015, positive): “Evidence in favor of state-dependent scal multipliers is provided by, among others, Auerbach and Gorodnichenko (2012, 2013), Batini, Callegari, and Melina (2012), Fazzari, Morley, and Panovska (2013).”
Catching two European birds with one renewable stone: Mitigating climate change and Eurozone crisis by an energy transition (2014, background): “First, they exhibit their most pronounced positive effect when the economy is in a slump, while they are less effective in a growing economy [55–57].”
Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data (2014, neutral): “In addition, z includes lags of the news variable to control for any serial correlation in the news variable.”
The Distributional Impact of Austerity and the Recession in Southern Europe (2014, background): “To start with, fiscal multipliers tend to be larger when the economy is in recession than when it is in expansion (Auerbach & Gorodnichenko 2012; Corsetti, Meier & Müller 2012; Eyraud & Weber 2013).”
Economic Policy Uncertainty Spillovers in Booms and Busts (2019, positive): “indicator, industrial production in our case, in line with other STVAR-based empirical analysis of the US business cycle (see, among others, Auerbach and Gorodnichenko (2012), Bachmann and Sims (2012), Caggiano, Castelnuovo, and Groshenny (2014), Berger and Vavra (2014), Nodari (2014), Caggiano, Cas”
Global Waves of Debt: Causes and Consequences (2021, background): “15 For details, see Auerbach and Gorodnichenko (2012, 2013); Huidrom et al. (2016, 2019); Ilzetzki, Mendoza, and Vegh (2013); and Nickel and Tudyka (2014). 16 See, for example, Ardagna, Caselli, and Lane (2007); Codogno, Favero, and Missale (2003); Laubach (2009); and Rubin, Orszag, and Sinai (2004)”
THRESHOLDS AND SMOOTH TRANSITIONS IN VECTOR AUTOREGRESSIVE MODELS (2013, methodology): “Also using US time series, Auerbach and Gorodnichenko (2012) investigate whether fiscal policy is more effective in recessions than in expansions.”
The Macroeconomic Effects of Public Investment: Evidence from Advanced Economies (2015, methodology): “…whether the effects of public investment vary with the state of the economy following a growing literature that explores the effect of fiscal policy during recessions and expansions (see Auerbach and Gorodnichenko 2013a, 2013b; Blanchard and Leigh 2013; IMF 2013; and the literature cited therein).”
Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies (2012, positive): “The evidence in Auerbach and Gorodnichenko (2012) and Baum and others (2012) confirm the view that multipliers tend to be larger in downturns than in expansions.”