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Fiscal policy and aggregate demand in the USA before, during, and following the Great Recession

Author

Listed:
  • David Cashin

    (Board of Governors of the Federal Reserve)

  • Jamie Lenney

    (Board of Governors of the Federal Reserve)

  • Byron Lutz

    (Board of Governors of the Federal Reserve)

  • William Peterman

    (Board of Governors of the Federal Reserve)

Abstract

We examine the direct effect of federal and subnational fiscal policy on aggregate demand in the USA by introducing the Fiscal Effect (FE) measure. FE can be decomposed into three components. Discretionary FE quantifies the effect of discretionary or legislated policy changes on aggregate demand. Cyclical FE captures the effect of the automatic stabilizers—changes in government taxes and spending arising from the business cycle. Residual FE measures the effect of all changes in government revenues and outlays which cannot be categorized as either discretionary or cyclical; for example, it captures the effect of the secular increase in entitlement program spending due to the aging of the population. Unlike other approaches, FE is a bottom-up approach that allows for differential effects on aggregate demand depending on the type and length of the policy change. Thus, FE is arguably the most detailed and comprehensive measure available of the stance of US fiscal policy in relation to aggregate demand. We use our new metric to examine the contribution of fiscal policy to growth in real GDP over the course of the Great Recession and current expansion. We compare this contribution to the contributions to growth in aggregate demand made by fiscal policy over past business cycles. In doing so, we highlight that the relatively strong support of government policy to GDP growth during the Great Recession was followed by a historically weak contribution over the course of the current expansion.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:itaxpf:v:25:y:2018:i:6:d:10.1007_s10797-018-9497-0
    DOI: 10.1007/s10797-018-9497-0
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    Cited by:

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    2. Cláudia Braz & Nicolas Carnot, 2019. "Euro Area Fiscal Policy Changes: Stylised Features of the Past Two Decades," European Economy - Discussion Papers 109, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Ray C. Fair, 2018. "Explaining the slow U.S. recovery: 2010–2017," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 53(4), pages 184-194, October.
    4. Plamen Nikolov & Paolo Pasimeni, 2023. "Fiscal Stabilization in the United States: Lessons for Monetary Unions," Open Economies Review, Springer, vol. 34(1), pages 113-153, February.
    5. David Autor & David Cho & Leland D. Crane & Mita Goldar & Byron Lutz & Joshua Montes & William B. Peterman & David Ratner & Daniel Villar & Ahu Yildirmaz, 2022. "The $800 Billion Paycheck Protection Program: Where Did the Money Go and Why Did It Go There?," Journal of Economic Perspectives, American Economic Association, vol. 36(2), pages 55-80, Spring.
    6. Marco Bernardini & Selien De Schryder & Gert Peersman, 2020. "Heterogeneous Government Spending Multipliers in the Era Surrounding the Great Recession," The Review of Economics and Statistics, MIT Press, vol. 102(2), pages 304-322, May.
    7. Bardhyl Dauti & Shiret Elezi, 2022. "Economic growth in the Central East European Union and the Western Balkan countries in the course of Stability and Growth Pact and COVID-19," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 40(1), pages 29-61.

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    More about this item

    Keywords

    Fiscal policy; Great Recession; Fiscal multipliers; Public debt and national budget; Public economics; Taxation; Automatic stabilizers;
    All these keywords.

    JEL classification:

    • H00 - Public Economics - - General - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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