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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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15407.

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Date of creation: Oct 2009
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Handle: RePEc:nbr:nberwo:15407

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Cited by:
  1. Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," NBER Working Papers 17240, National Bureau of Economic Research, Inc.
  2. 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.
  3. Clemens, Jeffrey & Miran, Stephen, 2010. "The effects of state budget cuts on employment and income," MPRA Paper 38715, University Library of Munich, Germany.
  4. Carrillo Julio A. & Poilly Céline, 2010. "Investigating the Zero Lower Bound on the Nominal Interest Rate under Financial Instability," Research Memoranda 019, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
  5. 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.
  6. 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.
  7. Robert S. Chirinko & Daniel J. Wilson, 2010. "Job creation tax credits and job growth: whether, when, and where?," Working Paper Series 2010-25, Federal Reserve Bank of San Francisco.
  8. 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.
  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. Alan Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis National Bureau of Economic Research, Inc.
  11. Jonathan A. Parker, 2011. "Consumer Spending and the Economic Stimulus Payments of 2008," 2011 Meeting Papers 254, Society for Economic Dynamics.
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