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Fiscal policy in the United States: automatic stabilizers, discretionary fiscal policy actions, and the economy

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  • Glenn Follette
  • Byron Lutz

Abstract

We examine the effects of the economy on the government budget as well as the effects of the budget on the economy. First, we provide measures of the effects of automatic stabilizers on budget outcomes at the federal and state and local levels. For the federal government, the deficit increases about 0.35 percent of GDP for each 1 percentage point deviation of actual GDP relative to potential GDP. For state and local governments, the deficit increases by about 0.1 percent of GDP. We then examine the response of the economy to the automatic stabilizers using the FRB/US model by comparing the response to aggregate demand shocks under two scenarios: with the automatic stabilizers in place and without the automatic stabilizers. Second, we provide measures of discretionary fiscal policy actions at the federal and state and local levels. We find that federal policy actions are somewhat counter-cyclical while state and local policy actions have been somewhat pro-cyclical. Finally, we evaluate the impact of the budget, from both automatic stabilizers and discretionary actions, on economic activity in 2008 and 2009.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2010-43.

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Date of creation: 2010
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Handle: RePEc:fip:fedgfe:2010-43

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Keywords: Fiscal policy ; Finance; Public;

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References

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  1. Rebecca M. Blank, 2000. "What Causes Public Assistance Caseloads to Grow?," JCPR Working Papers 18, Northwestern University/University of Chicago Joint Center for Poverty Research.
  2. Claudia R. Sahm & Matthew D. Shapiro & Joel Slemrod, 2009. "Household response to the 2008 tax rebates: survey evidence and aggregate implications," Finance and Economics Discussion Series 2009-45, Board of Governors of the Federal Reserve System (U.S.).
  3. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
  4. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," Working Papers 136, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  5. Christopher L. House & Matthew D. Shapiro, 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," American Economic Review, American Economic Association, vol. 98(3), pages 737-68, June.
  6. Follette, Glenn & Kusko, Andrea & Lutz, Byron, 2008. "State and Local Finances and the Macroeconomy: The High–Employment Budget and Fiscal Impetus," National Tax Journal, National Tax Association, vol. 61(3), pages 531-45, September.
  7. Joshua Aizenman & Gurnain Kaur Pasricha, 2010. "On the ease of overstating the fiscal stimulus in the US, 2008-9," NBER Working Papers 15784, National Bureau of Economic Research, Inc.
  8. Darrel Cohen & Glenn Follette, 2000. "The automatic fiscal stabilizers: quietly doing their thing," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 35-67.
  9. Julia Lynn Coronado & Joseph P. Lupton & Louise M. Sheiner, 2005. "The household spending response to the 2003 tax cut: evidence from survey data," Finance and Economics Discussion Series 2005-32, Board of Governors of the Federal Reserve System (U.S.).
  10. Darrel Cohen & Jason Cummins, 2006. "A retrospective evaluation of the effects of temporary partial expensing," Finance and Economics Discussion Series 2006-19, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Gerald Carlino & Robert P. Inman, 2013. "Macro fiscal policy in economic unions: states as agents," Working Papers 13-40, Federal Reserve Bank of Philadelphia.
  2. C. Randall Henning & Martin Kessler, 2012. "Fiscal Federalism: US History for Architects of Europe's Fiscal Union," Working Paper Series WP12-1, Peterson Institute for International Economics.
  3. Gondor Mihaela, 2012. "Theoretical Considerations Regarding The Automatic Fiscal Stabilizers Operating Mechanism," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 713-719, July.
  4. Peter Tulip, 2014. "Fiscal Policy and the Inflation Target," RBA Research Discussion Papers rdp2014-02, Reserve Bank of Australia.

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