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Fiscal and Monetary Policy During Downturns

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  • Sven Jari Stehn
  • Daniel Leigh

Abstract

This paper analyzes how fiscal and monetary policy typically respond during downturns in G7 countries. It evaluates whether discretionary fiscal responses to downturns are timely and temporary, and compares the response of fiscal policy to that of monetary policy. The results suggest that while responding more weakly and less quickly than monetary policy, discretionary fiscal policy is more timely than conventional wisdom would suggest, particularly in “Anglo-Saxon†countries, but the response differs substantially across fiscal instruments. Both fiscal and monetary policy are found to be subject to an easing bias, with more easing during downturns than tightening during upturns; and liable to easing in response to erroneously perceived downturns, many of which are subsequently revised to expansions.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/50.

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Length: 23
Date of creation: 01 Mar 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/50

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Related research

Keywords: Group of seven; Revenues; Economic models; fiscal policy; tax changes; discretionary fiscal policy; fiscal stimulus; tax cuts; fiscal instruments; fiscal balance; government expenditure; expenditure; tax reduction; tax credit; tax reform; discretionary fiscal stimulus; fiscal stabilization; tax cut; government revenue; fiscal variables; budget balance; tax rates; fiscal policy decisions; tax policy; primary fiscal balance; tax credits; tax incentives; expenditure control; budget balances; expenditures; fiscal affairs; public debt; fiscal affairs department; fiscal expansions; fiscal actions; fiscal policies; tax increase; spending cuts;

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References

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  1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(4), pages 1661-1707, December.
  2. Faust, Jon & Rogers, John H & Wright, Jonathan H, 2005. "News and Noise in G-7 GDP Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(3), pages 403-19, June.
  3. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, Econometric Society, vol. 55(3), pages 703-08, May.
  4. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3933, C.E.P.R. Discussion Papers.
  5. Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Working Papers 4765, National Bureau of Economic Research, Inc.
  6. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 1055-1084, September.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Research in fiscal policy: A cross section
    by pushmedia1 in The Ambrosini Critique on 2009-05-11 16:26:30
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Cited by:
  1. Balázs Égert, 2010. "Fiscal Policy Reaction to the Cycle in the OECD: Pro- or Counter-cyclical?," OECD Economics Department Working Papers 763, OECD Publishing.
  2. Cheikh Tidiane Ndiaye & Mamadou Abdoulaye Konte, 2012. "Politiques macroéconomiques et stabilisation des chocs dans la zone UEMOA," Working Papers, HAL halshs-00830595, HAL.
  3. Roberta Moreira Wichmann & Marcelo Savino Portugal, 2014. "Política Fiscal Assimétrica: O Caso Do Brasil," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Gra 038, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  4. Ross Guest & Anthony J. Makin, 2011. "The Dynamic Effects of Fiscal Stimulus in a Two Sector Open Economy," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c016_045, DEGIT, Dynamics, Economic Growth, and International Trade.
  5. Juan Antonio Cerón Cruz, 2011. "¿Qué preocupa a los gobiernos, la brecha de producción o el PIB?," Revista de Economía Crítica, Asociación de Economía Crítica, Asociación de Economía Crítica, vol. 12, pages 199-205.
  6. Ross Guest & Anthony J Makin, 2011. "Fiscal stimulus: An overlapping generations analysis," Discussion Papers in Economics, Griffith University, Department of Accounting, Finance and Economics economics:201102, Griffith University, Department of Accounting, Finance and Economics.
  7. Karin Mayr & Johann Scharler, 2009. "Asymmetric Fiscal Stabilization Policy and the Public Deficit: Theory and Evidence," Vienna Economics Papers, University of Vienna, Department of Economics 0908, University of Vienna, Department of Economics.
  8. Cerón, Juan A., 2012. "La respuesta de la política fiscal a la actividad económica en los países desarrollados/Fiscal policy reaction to economic activity in developed countries," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 30, pages 369 (32 pag, Abril.

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