Fiscal policy in good and bad times

Bertrand Candelon and Lenard Lieb

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 12, 2679-2694

Abstract: In this paper we analyze whether the effect of fiscal policy differs across the business cycle. To tackle this question, we use a regime-switching error-correction framework, where nonlinearities are only modeled in the short-run and have no impact on the long-run equilibrium. Regime specific shocks to government revenue and government purchases are identified using sign restrictions. Linear combinations of the impulse responses of these basic shocks are used to construct a deficit-spending shock and a deficit-financed tax-cut shock. We find that active spending policies have a stronger impact in recession, with multipliers exceeding unity, and should be preferred to deficit-financed tax-cuts.

Keywords: Fiscal policy; Nonlinearity; Threshold vector error-correction (search for similar items in EconPapers)
JEL-codes: E30 E32 E62 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (77)

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Working Paper: Fiscal policy in good and bad times (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:12:p:2679-2694

DOI: 10.1016/j.jedc.2013.09.001

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