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Fiscal Policy and the Business Cycle

Author

Listed:
  • György Molnár

    (Magyar Nemzeti Bank)

  • Gábor Dániel Soós

    (Magyar Nemzeti Bank)

  • Balázs Világi

    (Magyar Nemzeti Bank)

Abstract

After the 2007–2008 financial crisis and the subsequent prolonged, deep recession, the question of whether fiscal policy can be applied to stimulate the economy came into focus, as conventional tools of monetary policy became ineffective. Accordingly, the related research also received a new boost. The purpose of our paper is to present the new research results, which mainly focus on whether fiscal policy can be applied to influence business cycles. Although there is still much debate, the claim that the effects of fiscal policy are not constant, but rather depend on the state of the business cycle, has been supported by numerous theoretical models and empirical results: in prolonged, deep recessions, and especially in the case of a liquidity trap, the multiplier of government expenditures is high, while in the case of booms it is relatively low.

Suggested Citation

  • György Molnár & Gábor Dániel Soós & Balázs Világi, 2017. "Fiscal Policy and the Business Cycle," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 16(4), pages 58-85.
    • Handle: RePEc:mnb:finrev:v:16:y:2017:i:4:p:58-85
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    References listed on IDEAS

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    More about this item

    Keywords

    fiscal policy; expenditure multiplier; business cycles; liquidity trap; debtconstrained households;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory

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