Fiscal multipliers in good times and bad times

K Peren Arin,Faik Koray,Nicola Spagnolo

doi:10.1016/j.jmacro.2015.01.002

K Peren Arin, Faik Koray + Show 1 more

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https://doi.org/10.1016/j.jmacro.2015.01.002

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Abstract

This paper estimates the magnitudes of government spending and tax multipliers within a regime-switching framework for the U.S. economy during the period 1949:1–2006:4. Our results show that the magnitudes of spending multipliers are larger during periods of low economic activity, while the magnitudes of tax multipliers are larger during periods of high economic activity. We also show that the magnitudes of fiscal multipliers got smaller for episodes of low growth, while they got larger for episodes of high growth in the post 1980 period. Analyzing the effects of government spending and taxes on consumption and investment spending indicates that the magnitude of the effects of fiscal shocks on consumption and investment is very small.

Highlights

The role of fiscal policy in stabilizing business cycles came under scrutiny by researchers and policymakers about three decades ago
Our results show that the magnitudes of the spending multipliers are larger during episodes of low growth, while the magnitudes of tax multipliers are larger during episodes of high growth – a result that emphasizes the importance of non-linearities for fiscal multipliers
The non-linear framework used in this study provides larger multipliers for periods of high growth and smaller multipliers for periods of low growth during the post-1980 era when compared to the whole sample period, which indicates that previous findings about the post-1980 multipliers might be biased since they do not differentiate between different states of the economy

Summary

Introduction

The role of fiscal policy in stabilizing business cycles came under scrutiny by researchers and policymakers about three decades ago. Recent studies, including Alesina et al (2002) explain this puzzling result with the fact that, certain fiscal shocks, namely shocks to government wages and salaries, can have non-Keynesian effects. They show that negative shocks to government wages and salaries result in an increase in economic activity both in the short-run and in the long-run by decreasing labor demand and wages, and increasing business profits and investment. In the U.S, with President Obama’s fiscal stimulus package, there q We would like to thank Olivia Cassero, Gernot Doppelhoffer as well as workshop participants of ZEW Macroeconomics workshop 2012 in Mannheim, and seminar participants at NHH Bergen, Norway for useful comments and suggestions. We would like to thank the Editor and an anonimous referee for very valuable comments and suggestions

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