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Countercyclical Fiscal Policy

Paper Session

Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PST)

Marriott Marquis, San Diego Ballroom A
Hosted By: American Economic Association
  • Chair: Wendy Edelberg, U.S. Congressional Budget Office

Which Fiscal Levers Are Most Effective in Combating a Recession?

Valerie A. Ramey
,
University of California-San Diego
Sarah Zubairy
,
Texas A&M University

Abstract

This paper uses theory and empirical estimates to compare the efficacy of various fiscal tools in stimulating the economy during a recession. The paper compares various types of government purchases, such as increased hiring of government workers, military purchases, and infrastructure spending; transfers, both targeted and general; as well as various tax rate changes. The measure of efficacy is "bang for the buck," i.e. the stimulus to output or employment relative to a budgetary cost.

Effects of Fiscal Policy on Credit Markets

Alan Auerbach
,
University of California-Berkeley
Yuriy Gorodnichenko
,
University of California-Berkeley
Daniel Murphy
,
University of Virginia

Abstract

Credit markets typically freeze in recessions: access to credit declines and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in U.S. federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock.

National Fiscal Policies to Reduce Cyclical Volatility in U.S. States

Karen Dynan
,
Harvard University
Douglas Elmendorf
,
Harvard University

Abstract

Countercyclical fiscal policy generally focuses on national economic downturns. But U.S. states experience significantly different patterns of unemployment, and demand shocks appear to drive much of that variation. State budget rules limit the ability of states to mount their own countercyclical policies. Federal taxes and spending programs have countercyclical effects within states, but the magnitude of those effects depends on policies that were designed based on other considerations (just as the extent of national automatic stabilizers is the result of policies based on other considerations). Enacting stronger cross-state fiscal redistribution would reduce costly variation in unemployment within states.
Discussant(s)
Janice Eberly
,
Northwestern University
Gabriel Chodorow-Reich
,
Harvard University
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook