NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Decomposing the Fiscal Multiplier

James S. Cloyne, Òscar Jordà, Alan M. Taylor

NBER Working Paper No. 26939
Issued in April 2020
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics

Unusual circumstances often coincide with unusual fiscal policy actions. Much attention has been paid to estimates of how fiscal policy affects the macroeconomy, but these are typically average treatment effects. In practice, the fiscal “multiplier” at any point in time depends on the monetary policy response. Using the IMF fiscal consolidations dataset for identification and a new decomposition-based approach, we show how to evaluate these monetary-fiscal effects. In the data, the fiscal multiplier varies considerably with monetary policy: it can be zero, or as large as 2 depending on the monetary offset. We show how to decompose the typical macro impulse response function into (1) the direct effect of the intervention on the outcome; (2) the indirect effect due to changes in how other covariates affect the outcome when there is an intervention; and (3) a composition effect due to differences in covariates between treated and control subpopulations. This Blinder-Oaxaca-type decomposition provides convenient way to eva

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Document Object Identifier (DOI): 10.3386/w26939

 
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