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When is the Fiscal Multiplier High? A Comparison of Four Business Cycle Phases


Type

Working Paper

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Authors

Berge, T. 
De Ridder, M. 
Pfajfar, D. 

Abstract

This paper compares the effect of fiscal spending on economic activity across four phases of the business cycle. We show that the fiscal multiplier is higher when unemployment is increasing than when it is decreasing. Conversely, fiscal multipliers do not depend on whether the unemployment rate is above or below its long-term trend. This result emerges both in the analysis of long time-series at the U.S. national level as well as for a post-Vietnam War panel of U.S. states. Our findings synthesize previous, at times conflicting, evidence on the state-dependence of fiscal multipliers and imply that fiscal intervention early on in economic downturns is most effective at stabilizing output.

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Keywords

Fiscal multipliers, countercyclical policy, cross-sectional analysis, local projections

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Publisher

Faculty of Economics, University of Cambridge

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