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Fiscal Stimulus and Firms: A Tale of Two Recessions

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Abstract

In this paper, I examine the effects of a countercyclical fiscal policy that gave firms additional tax refunds--additional liquidity--at the end of the past two recessions. I take advantage of a discontinuity in the slope of the tax refund formula to estimate the policy's impact. I find that after passage of the policy in 2002, firms allocated $0.40 of every tax refund dollar to investment. After passage of the policy in 2009, in contrast, firms used the refunds to increase cash holdings ($0.96 of every refund dollar) before paying down debt in the following year. I provide evidence that differences in macroeconomic conditions across the two periods drove these differences in firm responses, illustrating how the effects of stimulus vary across recessionary states of the world. I also show that while the policy had no discernable effect on investment in the most recent recessionary period, it did reduce firms’ bankruptcy risk and the probability of a future credit- rating downgrade.

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  • Dobridge, Christine L., 2016. "Fiscal Stimulus and Firms: A Tale of Two Recessions," Finance and Economics Discussion Series 2016-13, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2016-13
    DOI: 10.17016/FEDS.2016.013
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    File URL: http://dx.doi.org/10.17016/FEDS.2016.013
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    Cited by:

    1. 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.
    2. Jean Barrot & Ramana Nanda, 2016. "Can Paying Firms Quicker Affect Aggregate Employment?," Working Papers id:11119, eSocialSciences.
    3. Jean-Noel Barrot & Ramana Nanda, 2016. "The Employment Effects of Faster Payment: Evidence from the Federal Quickpay Reform," Harvard Business School Working Papers 17-004, Harvard Business School, revised Jul 2018.
    4. repec:eee:jfinec:v:128:y:2018:i:2:p:287-319 is not listed on IDEAS

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    Keywords

    Financing policy; fiscal policy; fixed investment; taxation;

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