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Fiscal policy and aggregate demand in the USA before, during, and following the Great Recession

David Cashin, Jamie Lenney, Byron Lutz () and William Peterman ()
Additional contact information
David Cashin: Board of Governors of the Federal Reserve
Jamie Lenney: Board of Governors of the Federal Reserve
Byron Lutz: Board of Governors of the Federal Reserve

International Tax and Public Finance, 2018, vol. 25, issue 6, 1519-1558

Abstract: Abstract We examine the direct effect of federal and subnational fiscal policy on aggregate demand in the USA by introducing the Fiscal Effect (FE) measure. FE can be decomposed into three components. Discretionary FE quantifies the effect of discretionary or legislated policy changes on aggregate demand. Cyclical FE captures the effect of the automatic stabilizers—changes in government taxes and spending arising from the business cycle. Residual FE measures the effect of all changes in government revenues and outlays which cannot be categorized as either discretionary or cyclical; for example, it captures the effect of the secular increase in entitlement program spending due to the aging of the population. Unlike other approaches, FE is a bottom-up approach that allows for differential effects on aggregate demand depending on the type and length of the policy change. Thus, FE is arguably the most detailed and comprehensive measure available of the stance of US fiscal policy in relation to aggregate demand. We use our new metric to examine the contribution of fiscal policy to growth in real GDP over the course of the Great Recession and current expansion. We compare this contribution to the contributions to growth in aggregate demand made by fiscal policy over past business cycles. In doing so, we highlight that the relatively strong support of government policy to GDP growth during the Great Recession was followed by a historically weak contribution over the course of the current expansion.

Keywords: Fiscal policy; Great Recession; Fiscal multipliers; Public debt and national budget; Public economics; Taxation; Automatic stabilizers (search for similar items in EconPapers)
JEL-codes: H00 H31 H32 H62 E62 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Fiscal Policy and Aggregate Demand in the U.S. Before, During and Following the Great Recession (2017) Downloads
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