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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

    (Board of Governors of the Federal Reserve System)

  • Byron Lutz

    (Board of Governors of the Federal Reserve System)

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.

Suggested Citation

  • Glenn Follette & Byron Lutz, 2010. "Fiscal Policy in the United States: Automatic Stabilizers, Discretionary Fiscal Policy Actions, and the Economy," Revista de Economía y Estadística, Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas, vol. 0(1), pages 41-73, January.
  • Handle: RePEc:ief:reveye:v:48:y:2010:i:1:p:41-73
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    References listed on IDEAS

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    Cited by:

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    2. Gerald Carlino & Robert P. Inman, 2016. "Fiscal Stimulus in Economic Unions: What Role for States?," Tax Policy and the Economy, University of Chicago Press, vol. 30(1), pages 1-50.
    3. Rieth, Malte & Checherita-Westphal, Cristina & Attinasi, Maria-Grazia, 2016. "Personal income tax progressivity and output volatility: Evidence from OECD countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 968-996.
    4. Gerald A. Carlino & Robert P. Inman, 2013. "Macro fiscal policy in economic unions: states as agents," Working Papers 13-40, Federal Reserve Bank of Philadelphia.
    5. Jan Veld & Martin Larch & Marieke Vandeweyer, 2013. "Automatic Fiscal Stabilisers: What They Are and What They Do," Open Economies Review, Springer, vol. 24(1), pages 147-163, February.
    6. Mertens, Karel & Ravn, Morten O., 2014. "A reconciliation of SVAR and narrative estimates of tax multipliers," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 1-19.
    7. Stevan Luković, 2014. "The Role Of The Automatic Stabilizers In Modern Economy," Ekonomika, Journal for Economic Theory and Practice and Social Issues 2014-01, „Ekonomika“ Society of Economists, Niš (Serbia).
    8. David Cashin & Jamie Lenney & Byron Lutz & William Peterman, 2018. "Fiscal policy and aggregate demand in the USA before, during, and following the Great Recession," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(6), pages 1519-1558, December.
    9. Shoag, Daniel & Tuttle, Cody & Veuger, Stan, 2017. "Rules versus Home Rule: Local Government Responses to Negative Revenue Shocks," Working Paper Series rwp17-037, Harvard University, John F. Kennedy School of Government.
    10. Michael D. Evans & Trevor Chamberlain, 2014. "Measuring the Effects of Monetary and Fiscal Policy Changes on the U.S. Economy (1982-2012)," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 1-14, May.
    11. C. Randall HENNING & Martin KESSLER, 2012. "Fiscal Federalism: US History for Architects of Europe’s Fiscal Union," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 1-31.
    12. Tracy Gordon & Lucy Dadayan & Kim Rueben, 2020. "State and Local Government Finances in the COVID-19 Era," National Tax Journal, National Tax Association;National Tax Journal, vol. 73(3), pages 733-758, September.
    13. 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.
    14. Alcidi, Cinzia & Thirion, Gilles, 2017. "Fiscal Risk Sharing and Resilience to Shocks: Lessons for the euro area from the US," CEPS Papers 12595, Centre for European Policy Studies.
    15. Peter Tulip, 2014. "Fiscal Policy and the Inflation Target," International Journal of Central Banking, International Journal of Central Banking, vol. 10(2), pages 63-96, June.
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    17. Daniel J. Lewis, 2018. "Identifying shocks via time-varying volatility," Staff Reports 871, Federal Reserve Bank of New York.
    18. Laura Jaramillo & Mr. David Amaglobeli & Ms. Aleksandra Zdzienicka & Pooja Karnane, 2019. "Tax Reforms and Fiscal Shock Smoothing," IMF Working Papers 2019/113, International Monetary Fund.

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    More about this item

    Keywords

    Automatic stabilizers; Discretionary actions; Government budget;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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