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Fiscal Policy in Good and Bad Times

  • Candelon Bertrand
  • Lieb Lenard

    (METEOR)

Using a Threshold Vector Autoregression framework identified via sign restrictions, we answer three questions: First, are fiscal policy shocks regime-dependent? Second, which variables are governing the regime? Third, what are the effects of fiscal policies on the main macroeconomic variables in each of these states? The linearity hypothesis is strongly rejected, with the two detected regimes clearly identifiable as recession and boom phases. We find that fiscal policy shocks have a stronger impact in times of economic stress than in times of expansion, and that direct spending policies are more efficient than tax-cut policies in stabilizing the economy in the short-run.

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Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 001.

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Date of creation: 2011
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Handle: RePEc:unm:umamet:2011001
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