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Activist fiscal policy to stabilize economic activity

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  • Alan J. Auerbach
  • William G. Gale

Abstract

We review the evidence on the practice and effects of discretionary fiscal policy, particularly in the context of recent efforts to stimulate the economy, reaching two main conclusions. First, policy interventions have increased in this decade, pre-dating the 2009 stimulus. Second, despite a large economic literature on the topic, the state of theory and evidence is not as "shovel ready" as one would like. Although consumption and investment clearly respond to tax incentives and structural vector autoregressions show that lower taxes and higher government purchases can boost output, it is difficult to apply the findings in the current context, in part because multipliers and policy lags are likely to vary with economic conditions. Dynamic stochastic general equilibrium models can be adapted to address extreme economic conditions, but yield an extremely wide range of predicted impacts. The experience from large downturns – the U.S. Great Depression and the Japanese Lost Decade – is illuminating, but provides little evidence about policy effectiveness because systematic and sustained fiscal interventions were not attempted in either case.

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Bibliographic Info

Article provided by Federal Reserve Bank of Kansas City in its journal Proceedings - Economic Policy Symposium - Jackson Hole.

Volume (Year): (2009)
Issue (Month): ()
Pages: 327-374

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Handle: RePEc:fip:fedkpr:y:2009:p:327-374

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Keywords: Fiscal policy ; Economic conditions;

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Cited by:
  1. Emilia Mioara CAMPEANU, 2012. "How can be investigated the fiscal policy effects on the Romanian economy?," Anale. Seria Stiinte Economice. Timisoara, Faculty of Economics, Tibiscus University in Timisoara, vol. 0, pages 80-87, May.
  2. Jonathan A. Parker & Nicholas S. Souleles & David S. Johnson & Robert McClelland, 2011. "Consumer Spending and the Economic Stimulus Payments of 2008," NBER Working Papers 16684, National Bureau of Economic Research, Inc.
  3. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98 National Bureau of Economic Research, Inc.
  4. Raffaella Basile & Bruno Chiarini & Elisabetta Marzano, 2011. "Can we Rely upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Per Cent (or more) of GDP?," CESifo Working Paper Series 3521, CESifo Group Munich.
  5. Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," NBER Working Papers 17240, National Bureau of Economic Research, Inc.
  6. Thomas A. Garrett & Russell M. Rhine, 2011. "Economic freedom and employment growth in U.S. states," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 1-18.
  7. Simone Salotti & Carmine Trecroci, 2012. "Even Worse than You thought: The Impact of Public Debt on Aggregate Investment and Productivity," DEGIT Conference Papers c017_020, DEGIT, Dynamics, Economic Growth, and International Trade.
  8. Hans Fehr & Wolfgang Scherf & Michael Eilfort & Guido Raddatz, 2009. "Haushaltskonsolidierung: Sollte mit dem Ausstieg aus der Verschuldung erst nach Überwindung der Krise begonnen werden?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 62(21), pages 03-12, November.
  9. James R. Hines Jr., 2010. "State Fiscal Policies and Transitory Income Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 313-350.
  10. Landais, Bernard, 2011. "Conduite et efficacité de la politique économique : les leçons de la crise
    [Management and Efficiency of the Economic Policies : The Crisis' Lessons"]
    ," MPRA Paper 31223, University Library of Munich, Germany.
  11. Bartha, Zoltán & Sáfrányné Gubik, Andrea, 2012. "The significance of fiscal space in Europe’s response to the crisis," MPRA Paper 40346, University Library of Munich, Germany.
  12. David Andolfatto, 2010. "Fiscal multipliers in war and in peace," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 121-128.
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