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An Empirical Analysis of the Revival of Fiscal Activism in the 2000s

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  • John B. Taylor

    (Stanford University)

Abstract

Macroeconomic data indicate that the three American discretionary countercyclical stimulus packages of the 2000s had little if any direct impact on consumption or government purchases, and thus did not stimulate the economy as Keynesian models would predict. Households largely saved the transfers and tax rebates. The federal government only increased purchases by a very small amount. State and local governments saved their stimulus grants and shifted expenditures from purchases toward transfers. Counterfactual simulations of the 2009-10 period show that a stimulus-induced decline in state and local government purchases was larger than the increase at the federal level. Counterfactual simulations also show that a larger stimulus package—with the proportions going grants, federal purchases, and net transfers to households as in 2009-10— would not have increased government purchases or consumption by a larger amount. These results from the 2000’s experience raise doubts about the efficacy of such packages adding weight to similar assessments reached more than 30 years ago.

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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 10-031.

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Date of creation: Jul 2011
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Handle: RePEc:sip:dpaper:10-031

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References

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  1. Matthew D. Shapiro & Joel Slemrod, 2009. "Did the 2008 Tax Rebates Stimulate Spending?," American Economic Review, American Economic Association, vol. 99(2), pages 374-79, May.
  2. Gramlich, Edward M, 1979. "Stimulating the Macro Economy through State and Local Governments," American Economic Review, American Economic Association, vol. 69(2), pages 180-85, May.
  3. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," CEPR Discussion Papers 7236, C.E.P.R. Discussion Papers.
  4. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," NBER Working Papers 10784, National Bureau of Economic Research, Inc.
  5. Oh, Hyunseung & Reis, Ricardo, 2012. "Targeted transfers and the fiscal response to the great recession," Journal of Monetary Economics, Elsevier, vol. 59(S), pages S50-S64.
  6. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
  7. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
  8. Edward M. Gramlich, 1978. "State and Local Budgets the Day after It Rained: Why Is the Surplus So High?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 191-216.
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Citations

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Cited by:
  1. Gerald Carlino & Robert P. Inman, 2013. "Macro Fiscal Policy in Economic Unions: States as Agents," NBER Working Papers 19559, National Bureau of Economic Research, Inc.
  2. Perendia, George & Tsoukis, Chris, 2012. "The Keynesian multiplier, news and fiscal policy rules in a DSGE model," Dynare Working Papers 25, CEPREMAP.
  3. Felix Reichling & Charles Whalen, 2012. "Assessing the Short-Term Effects on Output of Changes in Federal Fiscal Policies: Working Paper 2012-08," Working Papers 43278, Congressional Budget Office.
  4. Robert Pollin & James Heintz, 2013. "Study of U.S. Financial System," FESSUD studies fstudy10, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
  5. Hong, Kiseok & Tang, Hsiao Chink, 2012. "Crises in Asia: Recovery and policy responses," Journal of Asian Economics, Elsevier, vol. 23(6), pages 654-668.
  6. John B. Taylor, 2014. "The Role of Policy in the Great Recession and the Weak Recovery," American Economic Review, American Economic Association, vol. 104(5), pages 61-66, May.
  7. 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.
  8. J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 233-297.
  9. Diego E. Vacaflores, 2013. "Monetary Transfers in the U.S.: How Efficient Are Tax Rebates?," Economies, MDPI, Open Access Journal, vol. 1(3), pages 26-48, November.
  10. Stephen A. Marglin & Peter Spiegler, 2013. "Where Did All the Money Go? Stimulus in Fact and Fantasy," INET Research Notes 31, Institute for New Economic Thinking (INET).
  11. Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 703-18, September.
  12. Makin, Anthony J. & Narayan, Paresh Kumar & Narayan, Seema, 2014. "What expenditure does Anglosphere foreign borrowing fund?," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 63-78.
  13. Virkola, Tuomo, 2014. "Exchange Rate Regime, Fiscal Foresight and the Effectiveness of Fiscal Policy in a Small Open Economy," ETLA Reports 20, The Research Institute of the Finnish Economy.

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