Lessons for Automatic Fiscal Stabilizers from the Great Recession and the COVID Recession

This paper simulates economic developments as if the discretionary fiscal stimulus enacted in the past two recessions had not occurred and additional automatic fiscal stabilizers had been deployed instead. For the calibration of key economic relationships most consistent with the empirical literature, we find that more sustained fiscal stimulus would have pushed unemployment down more rapidly following the Great Recession and that more limited stimulus would have caused inflation to increase much less following the COVID recession. We caution, though, that our estimates are uncertain given the large number of assumptions embedded in the calculations. Under different assumptions about the supply side of the economy when resource utilization is high, the stimulus enacted in early 2021 was not a significant cause of the observed runup in inflation that followed, and substituting an automatic stabilizer would have made little difference to inflation.