Fiscal and Monetary Policy During Downturns: Evidence from the G7

Daniel Leigh and Sven Jari Stehn ()

No 09/50, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: Fiscal policy; Group of seven; Monetary policy; Government expenditures; Revenues; Economic stabilization; Economic models; Cross country analysis (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fdg, nep-mac and nep-mon
Date: Written
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