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Fiscal Policy and Aggregate Demand in the U.S. Before, During and Following the Great Recession

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  • David B. Cashin
  • Jamie Lenney
  • Byron F. Lutz
  • William B. Peterman

Abstract

We examine the effect of federal and subnational fiscal policy on aggregate demand in the U.S. by introducing the fiscal effect (FE) measure. FE can be decomposed into three components. Discretionary FE quantifies the effect of discretionary or legislated policy changes on aggregate demand. Cyclical FE captures the effect of the automatic stabilizers--changes in government taxes and spending arising from the business cycle. Residual FE measures the effect of all changes in government revenues and outlays which cannot be categorized as either discretionary or cyclical; for example, it captures the effect of the secular increase in entitlement program spending due to the aging of the population. We use FE to examine the contribution of fiscal policy to growth in real GDP over the course of the Great Recession and current expansion. We compare this contribution to the contributions to growth in aggregate demand made by fiscal policy over past business cycles. In doing so, we highlight that the relatively strong support of government policy to GDP growth during the Great Recession was followed by a historically weak contribution over the course of the current expansion.

Suggested Citation

  • David B. Cashin & Jamie Lenney & Byron F. Lutz & William B. Peterman, 2017. "Fiscal Policy and Aggregate Demand in the U.S. Before, During and Following the Great Recession," Finance and Economics Discussion Series 2017-061, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2017-61
    DOI: 10.17016/FEDS.2017.061
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    File URL: https://www.federalreserve.gov/econres/feds/files/2017061pap.pdf
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    Keywords

    Fiscal policy ; Great Recession ; Multipliers ; Public debt and national budget ; Public economics ; Taxation ; Automatic stabilizers;

    JEL classification:

    • H00 - Public Economics - - General - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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