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Fiscal Policy in Good and Bad Times

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  • Candelon Bertrand
  • Lieb Lenard

    (METEOR)

Abstract

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.

Suggested Citation

  • Candelon Bertrand & Lieb Lenard, 2011. "Fiscal Policy in Good and Bad Times," Research Memorandum 001, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  • Handle: RePEc:unm:umamet:2011001
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    Cited by:

    1. Tommaso Ferraresi & Andrea Roventini & Willi Semmler, 2016. "Macroeconomic regimes, technological shocks and employment dynamics," Documents de Travail de l'OFCE 2016-19, Observatoire Francais des Conjonctures Economiques (OFCE).
    2. Caggiano, Giovanni & Castelnuovo, Efrem & Damette, Olivier & Parent, Antoine & Pellegrino, Giovanni, 2017. "Liquidity traps and large-scale financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 99-114.
    3. Şen, Hüseyin & Kaya, Ayşe, 2017. "How large are fiscal multipliers in Turkey?," EconStor Preprints 162763, ZBW - German National Library of Economics.
    4. Van Robays, Ine, 2012. "Macroeconomic uncertainty and the impact of oil shocks," Working Paper Series 1479, European Central Bank.
    5. Raju Huidrom & M. Ayhan Kose & Jamus J. Lim & Franziska L. Ohnsorge, 2016. "Do fiscal multipliers depend on fiscal positions?," CAMA Working Papers 2016-35, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Raffaella Basile & Bruno Chiarini & Giovanni Luca & Elisabetta Marzano, 2016. "Fiscal multipliers and unreported production: evidence for Italy," Empirical Economics, Springer, vol. 51(3), pages 877-896, November.
    7. Sebastian Gechert, 2015. "What fiscal policy is most effective? A meta-regression analysis," Oxford Economic Papers, Oxford University Press, vol. 67(3), pages 553-580.
    8. Lieb Lenard & Candelon Bertrand, 2015. "Testing for short-run threshold effects in a vector error-correction framework: a reappraisal of the stability of the US money demand," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(3), pages 355-376, June.
    9. Sébastien Charles & Thomas Dallery & Jonathan Marie, 2015. "Why the Keynesian Multiplier Increases During Hard Times: A Theoretical Explanation Based on Rentiers' Saving Behaviour," Metroeconomica, Wiley Blackwell, vol. 66(3), pages 451-473, July.
    10. Abderrahim Chibi & Mohamed Benbouziane & Sidi Mohamed Chekouri, 2014. "The Impact of Fiscal Policy on Economic Activity Over the Bsiness Cycle: An Emirical Investigation in the Case of Algeria," Working Papers 845, Economic Research Forum, revised Oct 2014.
    11. Şen, Hüseyin & Kaya, Ayşe, 2015. "Growth enhancing effect of discretionary fiscal policy shocks: Keynesian, Weak Keynesian or Non-Keynesian?," MPRA Paper 65976, University Library of Munich, Germany, revised 05 Aug 2015.
    12. repec:eee:ecmode:v:68:y:2018:i:c:p:372-387 is not listed on IDEAS
    13. Fazzari Steven M. & Morley James & Panovska Irina, 2015. "State-dependent effects of fiscal policy," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(3), pages 285-315, June.
    14. Mark Setterfield, 2015. "Time variation in the size of the multiplier: a Kalecki-Harrod approach," Working Papers 1522, New School for Social Research, Department of Economics, revised Jan 2017.
    15. Markus Eller & Martin Feldkircher & Florian Huber, 2017. "How would a fiscal shock in Germany affect other European countries? Evidence from a Bayesian GVAR model with sign restrictions," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 54-77.
    16. repec:eee:dyncon:v:78:y:2017:i:c:p:54-87 is not listed on IDEAS
    17. António Afonso & Jaromír Baxa & Michal Slavík, 2018. "Fiscal developments and financial stress: a threshold VAR analysis," Empirical Economics, Springer, vol. 54(2), pages 395-423, March.
    18. Metiu, Norbert & Hilberg, Björn & Grill, Michael, 2016. "Credit constraints and the international propagation of US financial shocks," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 67-80.
    19. Mihai Ioan Mutascu & Dan Constantin Danuletiu, 2011. "Taxes And Economic Growth In Romania. A Var Approach," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(13), pages 1-10.
    20. Topal, Pinar, 2015. "Fiscal stimulus and labor market flexibility," SAFE Working Paper Series 90, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    21. Steven M. Fazzari & James Morley & Irina B. Panovska, 2017. "When Do Discretionary Changes in Government Spending or Taxes Have Larger Effects?," Discussion Papers 2017-04, School of Economics, The University of New South Wales.
    22. repec:eee:ecmode:v:68:y:2018:i:c:p:273-292 is not listed on IDEAS
    23. Sebastian Gechert & Ansgar Rannenberg, 2014. "Are Fiscal Multipliers Regime-Dependent? A Meta Regression Analysis," IMK Working Paper 139-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    24. Djuric, Uros & Neugart, Michael, 2017. "Helicopter money: survey evidence on expectation formation and consumption behavior," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168062, Verein für Socialpolitik / German Economic Association.
    25. Metiu, Norbert & Hilberg, Björn & Grill, Michael, 2015. "Financial frictions and global spillovers," Discussion Papers 04/2015, Deutsche Bundesbank.

    More about this item

    Keywords

    monetary economics ;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • 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

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