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Fiscal Multipliers in Recessions

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  • Canzoneri, Matthew B
  • Collard, Fabrice
  • Dellas, Harris
  • Diba, Behzad

Abstract

The Great Recession, and the fiscal response to it, has revived interest in the size of fiscal multipliers. Standard business cycle models have difficulties generating multipliers greater than one. And they also cannot produce any significant state-dependence in the size of the multipliers over the business cycle. In this paper we employ a variant of the Curdia-Woodford model of costly financial intermediation and show that fiscal multipliers can be strongly state dependent in a countercyclical manner. In particular, a fiscal expansion during a recession may lead to multiplier values exceeding two, while a similar expansion during an economic boom would produce multipliers falling short of unity. This pattern obtains if the spread (the financial friction) is more sensitive to fiscal policy during recessions than during expansions, a feature that is present in the data. Our results are consistent with recent empirical work documenting the state contingency of multipliers.

Suggested Citation

  • Canzoneri, Matthew B & Collard, Fabrice & Dellas, Harris & Diba, Behzad, 2015. "Fiscal Multipliers in Recessions," CEPR Discussion Papers 10353, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10353
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    References listed on IDEAS

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    More about this item

    Keywords

    cyclicality; financial frictions; government spending multipliers;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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