NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Measuring the Output Responses to Fiscal Policy

Alan J. Auerbach, Yuriy Gorodnichenko

NBER Working Paper No. 16311
Issued in August 2010
NBER Program(s):   EFG   PE

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.

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This paper was revised on June 13, 2013

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