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Fiscal and Monetary Policy During Downturns; Evidence From the G7

  • Sven Jari Stehn
  • Daniel Leigh

This paper analyzes how fiscal and monetary policy typically respond during downturns in G7 countries. It evaluates whether discretionary fiscal responses to downturns are timely and temporary, and compares the response of fiscal policy to that of monetary policy. The results suggest that while responding more weakly and less quickly than monetary policy, discretionary fiscal policy is more timely than conventional wisdom would suggest, particularly in “Anglo-Saxon†countries, but the response differs substantially across fiscal instruments. Both fiscal and monetary policy are found to be subject to an easing bias, with more easing during downturns than tightening during upturns; and liable to easing in response to erroneously perceived downturns, many of which are subsequently revised to expansions.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/50.

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Length: 23
Date of creation: 01 Mar 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/50
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  1. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
  2. Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Working Papers 4765, National Bureau of Economic Research, Inc.
    • Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 13-80 National Bureau of Economic Research, Inc.
  3. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  4. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  5. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
  6. Jon Faust & John H. Rogers & Jonathan H. Wright, 2000. "News and noise in G-7 GDP announcements," International Finance Discussion Papers 690, Board of Governors of the Federal Reserve System (U.S.).
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