Measuring the Output Responses to Fiscal Policy

Alan J. Auerbach, Yuriy Gorodnichenko

NBER Working Paper No. 16311
Issued in August 2010, Revised in June 2013
NBER Program(s):Economic Fluctuations and Growth, Public Economics

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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w16311

Published:

• Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May. citation courtesy of
• Measuring the Output Responses to Fiscal Policy, Alan J. Auerbach, Yuriy Gorodnichenko. in Fiscal Policy (Trans-Atlantic Public Economics Seminar, TAPES), Gordon and Perotti. 2012