Fiscal Multipliers in Recession and Expansion

Alan J. Auerbach, Yuriy Gorodnichenko

Chapter in NBER book Fiscal Policy after the Financial Crisis (2013), Alberto Alesina and Francesco Giavazzi, editors (p. 63 - 98)
Conference held December 12-13, 2011
Published in June 2013 by University of Chicago Press
© 2013 by the National Bureau of Economic Research

This chapter examines the size of fiscal multipliers in the midst of an economic recession, first estimating multipliers for a large number of Organization for Economic Cooperation and Development (OECD) countries. Second, it adapts the authors' previous methodology to use direct projections rather than the standard structural vector autoregression (SVAR) approach to estimate multipliers, to economize on degrees of freedom, and to relax the assumptions on impulse response functions imposed by the SVAR method. Third, the chapter estimates responses not only of output but also of other macroeconomic aggregates. It is shown that multipliers of government purchases are larger in a recession, and that controlling for real-time predictions of government purchases tends to increase the estimated multipliers of government spending in recession.

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