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When is the Fiscal Multiplier High? A Comparison of Four Business Cycle Phases

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  • Berge, T.
  • De Ridder, M.
  • Pfajfar, D.

Abstract

This paper compares the effect of fiscal spending on economic activity across four phases of the business cycle. We show that the fiscal multiplier is higher when unemployment is increasing than when it is decreasing. Conversely, fiscal multipliers do not depend on whether the unemployment rate is above or below its long-term trend. This result emerges both in the analysis of long time-series at the U.S. national level as well as for a post-Vietnam War panel of U.S. states. Our findings synthesize previous, at times conflicting, evidence on the state-dependence of fiscal multipliers and imply that fiscal intervention early on in economic downturns is most effective at stabilizing output.

Suggested Citation

  • Berge, T. & De Ridder, M. & Pfajfar, D., 2020. "When is the Fiscal Multiplier High? A Comparison of Four Business Cycle Phases," Cambridge Working Papers in Economics 2041, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2041
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    Cited by:

    1. Abdul Jalil, 2021. "Austerity: Which Way Now?," PIDE Knowledge Brief 2021:21, Pakistan Institute of Development Economics.
    2. Alexander Doser & Ricardo Nunes & Nikhil Rao & Viacheslav Sheremirov, 2023. "Inflation expectations and nonlinearities in the Phillips curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(4), pages 453-471, June.
    3. Dennis Bonam & Paul Konietschke, 2020. "Tax multipliers across the business cycle," Working Papers 699, DNB.
    4. Ardanaz, Martín & Cavallo, Eduardo A. & Izquierdo, Alejandro & Puig, Jorge, 2021. "The Output Effects of Fiscal Consolidations: Does Spending Composition Matter?," IDB Publications (Working Papers) 11857, Inter-American Development Bank.
    5. Maarten De Ridder & Simona Hannon & Damjan Pfajfar, 2020. "The Multiplier Effect of Education Expenditure," Finance and Economics Discussion Series 2020-058, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Fiscal multipliers; countercyclical policy; cross-sectional analysis; local projections;
    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
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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