Fiscal multipliers vary over business cycle

Debate over fiscal policy and fiscal miultipliers just keeps getting interested. Gulzar summarises debate on fiscal policy institutions. And now this recent paper by Alan J. Auerbach, Yuriy Gorodnichenko says that fiscal multipliers differe depending on what part of business cxycle you are on. The multiplier is around 1-1.5 in recessions and 0-0.5 in expansions.

In Voxeu, they summarise their paper:

Plainly, the size of the multiplier varies considerably over the business cycle. For example, in 1985 an increase in government spending would have barely increased output. In contrast, a dollar increase in government spending in 2009 could raise output by about $1.75. Typically, the multiplier is between 0 and 0.5 in expansions and between 1 and 1.5 in recessions.

Note the size of the multiplier tends to change relatively quickly as the economy starts to grow after reaching a trough. Thus, the timing of changes in discretionary government spending is critical for effectiveness of countercyclical fiscal policies.

Second, to measure the effects of a broader range of policies, we estimate multipliers for more disaggregate spending variables, which often behave quite differently in relation to aggregate fiscal policy shocks.

Specifically, we find that defence spending has the largest multiplier, with the maximum response of output being $3.56 for every dollar in defence spending in a recession.

Fascinating stuff.

One Response to “Fiscal multipliers vary over business cycle”

  1. Business multipliers Says:

    […] Fiscal multipliers vary over business cycle В« Mostly Economics Sep 10, 2010 … Plainly, the size of the multiplier varies considerably over the business cycle. … […]

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