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American Economic Journal: Economic Policy: Vol. 4 No. 2 (May 2012)

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Measuring the Output Responses to Fiscal Policy

Article Citation

Auerbach, Alan J., and Yuriy Gorodnichenko. 2012. "Measuring the Output Responses to Fiscal Policy." American Economic Journal: Economic Policy, 4(2): 1-27.

DOI: 10.1257/pol.4.2.1

Abstract

A key issue in current research and policy is the size of fiscal multipliers when the economy is in recession. We provide three insights. First, using regime-switching models, we find large differences in the size of spending multipliers in recessions and expansions with fiscal policy being considerably more effective in recessions than in expansions. Second, we estimate multipliers for more disaggregate spending variables which behave differently relative to aggregate fiscal policy shocks, with military spending having the largest multiplier. Third, we show that controlling for predictable components of fiscal shocks tends to increase the size of the multipliers in recessions. (JEL C32, E62, H20, H62, H63)

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Authors

Auerbach, Alan J. (U CA, Berkeley)
Gorodnichenko, Yuriy (U CA, Berkeley)

JEL Classifications

C32: Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
E62: Fiscal Policy
H20: Taxation, Subsidies, and Revenue: General
H62: National Deficit; Surplus
H63: National Debt; Debt Management; Sovereign Debt

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