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Fiscal policy in good and bad times

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  • Candelon, Bertrand
  • Lieb, Lenard

Abstract

In this paper we analyze whether the effect of fiscal policy differs across the business cycle. To tackle this question, we use a regime-switching error-correction framework, where nonlinearities are only modeled in the short-run and have no impact on the long-run equilibrium. Regime specific shocks to government revenue and government purchases are identified using sign restrictions. Linear combinations of the impulse responses of these basic shocks are used to construct a deficit-spending shock and a deficit-financed tax-cut shock. We find that active spending policies have a stronger impact in recession, with multipliers exceeding unity, and should be preferred to deficit-financed tax-cuts.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 12 ()
Pages: 2679-2694

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2679-2694

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Fiscal policy; Nonlinearity; Threshold vector error-correction;

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Citations

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Cited by:
  1. Steven Fazzari & James Morley & Irina Panovska, 2013. "State-Dependent Effects of Fiscal Policy," Discussion Papers 2012-27A, School of Economics, The University of New South Wales.
  2. Sebastian Gechert, 2013. "What fiscal policy is most effective? A Meta Regression Analysis," IMK Working Paper 117-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  3. Ine Van Robays, 2012. "Macroeconomic Uncertainty and the Impact of Oil Shocks," CESifo Working Paper Series 3937, CESifo Group Munich.

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