Has fiscal policy helped stabilize the postwar U.S. economy?

Abstract

In this paper, I consider whether postwar fiscal policy has helped stabilize the U.S. economy. I do this by adding to the stochastic growth model fiscal policy feedback rules estimated from postwar data. These rules allow fiscal policies to respond to current and lagged output and labor hours. I use the estimated policy rules to see if postwar fiscal policy reduces output volatility and/or lengthens expansions and shortens recessions. I find that fiscal policy in general provides little stability on either count. I also find that the endogenous feedback links, by themselves, can provide some stabilization.