New evidence on state-dependent fiscal multipliers

Building on the dataset and identification strategy of Ramey and Zubairy (2018), this paper investigates the dynamic effects of fiscal shocks using a state-dependent local projection approach. By interacting fiscal shocks with a continuous state variable, the analysis captures how fiscal multipliers evolve over the business cycle. This approach is novel within this literature, as most previous studies rely on two-regime estimates to account for non-linearity. The results indicate that the government spending multiplier varies significantly, ranging from near zero during expansions to slightly below one in downturns. While this evidence highlights meaningful state dependence in the transmission of fiscal policy, the relatively modest size of the estimated multipliers calls for caution in drawing strong conclusions about the effectiveness of countercyclical policies.