Effects Of Fiscal Stimulus Research Articles

Spatial spillovers and the effects of fiscal stimulus: evidence from pandemic-era federal aid for state and local governments

ABSTRACT We analyse whether US federal aid to state and local governments impacted economic activity through either direct or cross-state spillover effects during the COVID-19 pandemic. Deploying an instrumental-variables framework rooted in the funding advantage of states that are over-represented in Congress, we find that federal assistance had significantly less impact on state and local government employment, as well as broader measures of economic activity, than estimates from prior crisis responses would imply. The modest employment impacts we find stem largely from the direct effect of states’ own aid allocation, as opposed to spillovers across state lines. These findings point to an important role for variations in fiscal policy transmission mechanisms, namely that cross-state spillovers are less likely to be important when some of the key mechanisms for such spillovers, like robust interjurisdictional supply chains and patterns of consumption, are muted or shut down.

Time to build, financial frictions, and the effectiveness of fiscal stimulus

<p>By introducing time to build, which creates a time-lag between government investment and the accumulation of productive capital, into an analysis of fiscal stimulus to the economy with financial frictions, we find that the effectiveness of fiscal policy is dampened. While the weakening effects of time to build become significantly weaker alongside with a higher fraction of government bonds allocated to leverage-constrained banks, which can be explained by a high correlation between time to build and financial frictions in both worsening balance sheet conditions of banks. Furthermore, the stimulus effects of public investment become stronger associated with shorter time-to-build period.</p>

Policy coordination and the effectiveness of fiscal stimulus

This paper shows that government spending shocks in the U.S. has become ineffective due to lack of coordination between monetary and fiscal policies. Employing the post-war U.S. data, we report strong stimulus effects of fiscal policy during the pre-Volcker era, which rapidly dissipate as the sample period is shifted toward the post-Volcker era. We explain the causes of this phenomena via a sentiment channel. Employing the Survey of Professional Forecasters data, we show that forecasters tend to systematically overestimate real GDP growth in response to positive innovations in government spending when policies coordinate well with each other. On the other hand, they are likely to underestimate real GDP responses when the monetary authority maintains a hawkish stance that conflicts with the fiscal stimulus. The fiscal stimulus, under such circumstances, generates consumer pessimism, which reduces private spending and ultimately weakens the output effects of fiscal policy. We further report statistical test results that confirm our claims.

Global growth on life support? The contributions of fiscal and monetary policy since the global financial crisis

AbstractThis paper compares the role of monetary and fiscal policy shocks in advanced and emerging economies. Using a model with a hierarchical structure, we capture the variability of GDP response to policy shocks both between and within the groups of advanced and emerging countries. Our results show that the effects of fiscal stimulus are higher in advanced economies compared to emerging markets, while monetary policy is found to have more homogeneous effects on GDP. We quantify the policy contribution on GDP growth in the decade that followed the global financial crisis by means of a structural counterfactual analysis based on conditional forecasts. We find that global GDP growth benefited from substantial policy support during the global financial crisis but policy tightening thereafter, particularly fiscal consolidation, acted as a significant drag on the subsequent global recovery. In addition, we show that the role of policy has differed across countries. Specifically, in advanced economies, highly accommodative monetary policy has been counteracted by strong fiscal consolidation. By contrast, in emerging economies, monetary policy has been less accommodative since the global recession.

Money, debt, and the effects of fiscal stimulus

A dynamic stochastic general equilibrium (DSGE) model where money and public debt play crucial roles in influencing the effects and transmission mechanisms of fiscal stimulus was developed in this paper. The model was estimated using data from the Chinese economy and then used to analyse the economic and financial dynamics and effects of fiscal stimulus under different fiscal financing scenarios. The simulation results revealed that, contrary to previous findings, a money-financed stimulus is not output-promoting and may lead to significant fluctuations in the main economic and financial variables. Meanwhile, despite the adverse effect of a high-debt environment on its short-term effects, expanded government spending stimulus engenders long-term enhancements of fiscal effectiveness at higher levels of public debt. As for tax cut stimulus, the short-term impact on promoting output is improved under higher public debt, whereas the long-term adverse effect is strengthened as public debt grows.

Towards an effective fiscal stimulus: Evidence from Botswana

While there is a general agreement on the effectiveness of fiscal stimulus, there is no consensus on which stimulus is better. To address this concern, this paper uses a Dynamic Stochastic General ...

The effects of fiscal stimulus: firm-level evidence from selective temporary consumption tax cuts

AbstractThe paper investigates the effects of temporary consumption tax cuts for selected durables in Turkey in 2009 using firm-level data. Our empirical strategy exploits variation in firm exposure to the tax cuts and at the same time controls for unobserved industry- and region-specific shocks to address potential endogeneity. Using data on the change of sales of firms that benefited from this measure and of those that did not over different periods, we find positive and robust effects of consumption tax cuts on the change of firm sales. In line with theoretical predictions, we also find a reversal of these effects following the expiration of the tax cuts.

Long‐term Effects of Fiscal Stimulus and Austerity in Europe

AbstractWe analyze whether there are ne gative (positive) long‐term effects of austerity measures (stimulus measures) on potential output growth. Based on the approach of Blanchard and Leigh () and Fatás and Summers () and using a novel data set of narratively identified fiscal policy shocks, we estimate the impact of these shocks on potential output. We robustly find a considerable underestimation of multiplier effects and their persistence for most European countries in the early years after the financial crisis and subsequent Euro Area crisis. We conclude that fiscal consolidation was badly timed and thus not only deepened the crisis but may have caused evitable hysteresis effects.

Dynamic Analysis of Fiscal Policy in the United Kingdom

<p><em>This paper studies the effects of fiscal stimuli on the real GDP of the United Kingdom for the period of 1997 through the first quarter of 2017. Structural vector autoregressive and vector error correction models are estimated. Impulse responses from both models provide support for the Keynesian view that fiscal stimuli are associated with rises in the real GDP. Variance decomposition analysis shows that over time, depending which model is considered; tax cuts impart a positive effect on the real GDP in the range of 5 to 20 percent. Government expenditure shocks account for 8 to 15 percent of variations in the real GDP based on the two models. The multipliers of tax cuts and government expenditures initially rise reaching a peak in the ninth quarter and decline to 1.60 and 1.74 in three years, respectively. </em></p>

Identification in Macroeconomics

This paper discusses empirical approaches macroeconomists use to answer questions like: What does monetary policy do? How large are the effects of fiscal stimulus? What caused the Great Recession? Why do some countries grow faster than others? Identification of causal effects plays two roles in this process. In certain cases, progress can be made using the direct approach of identifying plausibly exogenous variation in a policy and using this variation to assess the effect of the policy. However, external validity concerns limit what can be learned in this way. Carefully identified causal effects estimates can also be used as moments in a structural moment matching exercise. We use the term “identified moments” as a short-hand for “estimates of responses to identified structural shocks,” or what applied microeconomists would call “causal effects.” We argue that such identified moments are often powerful diagnostic tools for distinguishing between important classes of models (and thereby learning about the effects of policy). To illustrate these notions we discuss the growing use of cross-sectional evidence in macroeconomics and consider what the best existing evidence is on the effects of monetary policy.

A method for improving predictive modeling by taking into account lag time: Example of selenium bioaccumulation in a flowing system

For bioaccumulative substances, efforts to predict concentrations in organisms at upper trophic levels, based on measurements of environmental exposure, have been confounded by the appreciable but hitherto unknown amount of time it may take for bioaccumulation to occur through various pathways and across several trophic transfers. The study summarized here demonstrates an objective method of estimating this lag time by testing a large array of potential lag times for selenium bioaccumulation, selecting the lag that provides the best regression between environmental exposure (concentration in ambient water) and concentration in the tissue of the target organism. Bioaccumulation lag is generally greater for organisms at higher trophic levels, reaching times of more than a year in piscivorous fish. Predictive modeling of bioaccumulation is improved appreciably by taking into account this lag. More generally, the method demonstrated here may improve the accuracy of predictive modeling in a wide variety of other cause-effect relationships in which lag time is substantial but inadequately known, in disciplines as diverse as climatology (e.g., the effect of greenhouse gases on sea levels) and economics (e.g., the effects of fiscal stimulus on employment).

Government spending multipliers and the zero lower bound

It is well-known that when the nominal interest rate hits the zero lower bound, the size of the fiscal multiplier can be large. The effectiveness of fiscal stimulus depends on the duration and the expected duration of the zero-lower-bound regime. Most studies fix this duration and therefore suffer from a bias. In this paper, we propose a way to estimate the government spending multiplier that allows this duration to be endogenously determined. Specifically, we incorporate into the Smets and Wouters (2007) model a monetary policy reaction function that follows a two-state Markov-switching process, and use data to pin down the transitional probability from one policy regime to the other. We then estimate the model and compute the fiscal multiplier using a data set that spans 1985:2–2015:3.

Fiscal policy after the financial crisis

The recent recession has brought fiscal policy back to the forefront, with economists and policy makers struggling to reach a consensus on issues like tax rates and government spending. At the heart of the debate are fiscal multipliers, whose size and sensitivity determine the power of such policies to influence economic growth. Fiscal Policy after the Financial Crisis focuses on the effects of fiscal stimuli and increased government spending, with contributions that consider the measurement of the multiplier effect and its size. Further contributions discuss the merits of alternate means of debt reduction through decreased government spending or increased taxes. A final section examines how the short-term political forces driving fiscal policy might be balanced with aspects of the long-term planning governing monetary policy.

The Effects of Fiscal Policy in a Small Open Economy with a Fixed Exchange Rate

We study the empirical effects of fiscal policy in Denmark since the adop- tion of a fixed exchange rate policy in 1982. Denmark's fixed exchange rate implies that the nominal interest rate remains fixed after a fiscal expansion, facilitating a sub- stantial impact of the fiscal stimulus on the real economy. On the other hand, the large degree of openness of the Danish economy means that a sizeable share of the fiscal stimulus will be directed towards imported goods. Our results suggest that the 'monetary accomodation channel' dominates the 'leakage effect' in the short run. We demonstrate that fiscal stimulus has a rather large impact on economic activity in the very short run, with a government spending multiplier of 1.1 on impact in our preferred specification. We also find that the effects of fiscal stimulus are rather short- lived in Denmark, with the effect on output becoming insignificant after around two years. The fiscal multiplier is above 1 only in the first quarter, and drops to 0.6 one year after the shock. We also find that in the short run, the government spending mul- tiplier is larger than the tax multiplier. Finally, we demonstrate that exogenous shocks to government spending account for less than 10 % of the movements in output over the business cycle in Denmark.

A disaggregated approach to the determination of government spending multipliers

This paper contributes to the debate on the effects of fiscal stimuli by showing that the impact of government expenditure depends on its composition. Government spending is not homogeneous and its effects on economic variables vary depending on its type. Comparing the effects of three types of government spending (investment, wage and non-wage components of consumption), it is concluded that government investment shocks are not the most effective spending shocks in boosting output, contrary to common opinion. Instead, the wage component government consumption has the biggest impact, whereas the non-wage component government consumption has the least. This variation stems mainly from the effects on (private) consumption.

The Economic Effects of Fiscal Consolidation with Debt Feedback

The past several years of recession and slow recovery have raised much interest on the effect of fiscal stimulus on economic activity, even as high public debts in many countries would call for fiscal consolidation. To evaluate the delicate balance between stimulus and consolidation requires measuring the size of fiscal multipliers, which often depends on having quarterly data so that exogenous fiscal policy shocks can be identified. We estimate fiscal multipliers using a novel methodology for identifying fiscal shocks within a structural vector autoregressive approach using annual data while controling for debt feedback effects. The estimation focuses on regions with scarce quarterly data (mostly low-income countries), and uses results for advanced economies, emerging market countries, and other broad groupings for which alternative estimates are available to validate the methodology. Differently from advanced and emerging market economies, fiscal consolidation in low-income countries has only a small temporary negative effect on growth while raising medium-term output. Shifting the composition of public spending toward capital expenditure further supports long-run growth.

The Economic Effects of Fiscal Consolidation with Debt Feedback

The past several years of recession and slow recovery have raised much interest on the effect of fiscal stimulus on economic activity, even as high public debts in many countries would call for fiscal consolidation. To evaluate the delicate balance between stimulus and consolidation requires measuring the size of fiscal multipliers, which often depends on having quarterly data so that exogenous fiscal policy shocks can be identified. We estimate fiscal multipliers using a novel methodology for identifying fiscal shocks within a structural vector autoregressive approach using annual data while controling for debt feedback effects. The estimation focuses on regions with scarce quarterly data (mostly low-income countries), and uses results for advanced economies, emerging market countries, and other broad groupings for which alternative estimates are available to validate the methodology. Differently from advanced and emerging market economies, fiscal consolidation in low-income countries has only a small temporary negative effect on growth while raising medium-term output. Shifting the composition of public spending toward capital expenditure further supports long-run growth.

The Effects of Fiscal Stimulus: Evidence from the 2009 Cash for Clunkers Program*

Abstract We evaluate the impact of the 2009 Cash for Clunkers program on short- and medium-run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex ante exposure to the program as measured by the number of “clunkers” in the city as of summer 2008. We find that the program induced the purchase of an additional 370,000 cars in July and August 2009. However, we find strong evidence of reversal; high clunker counties bought fewer autos in the 10 months after the program expired, which offset most of the initial purchases. We find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

The Effects of Fiscal Stimulus: Evidence from the 2009 ‘Cash for Clunkers’ Program

A key rationale for fiscal stimulus is to boost consumption when aggregate demand is perceived to be inefficiently low. We examine the ability of the government to increase consumption by evaluating the impact of the 2009 “Cash for Clunkers” program on short and medium run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended. The effect of the program on auto purchases was significantly more short-lived than previously suggested. We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

Comment on: “Global effects of fiscal stimulus during the crisis” by Charles Freedman, Michael Kumhof, Douglas Laxton, Dick Muir, Susanna Mursula

Comment on: “Global effects of fiscal stimulus during the crisis” by Charles Freedman, Michael Kumhof, Douglas Laxton, Dick Muir, Susanna Mursula