Measuring the Output Responses to Fiscal Policy
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.
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. This version corrects an accounting mistake and supersedes earlier versions of the paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May. citation courtesy of
Measuring the Output Responses to Fiscal Policy, Alan J. Auerbach, Yuriy Gorodnichenko. in Fiscal Policy (Trans-Atlantic Public Economics Seminar, TAPES), Gordon and Perotti. 2012