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

Travis Berge, Maarten De Ridder and Damjan Pfajfar ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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.

Keywords: Fiscal multipliers; countercyclical policy; cross-sectional analysis; local projections (search for similar items in EconPapers)
JEL-codes: C31 C32 E62 (search for similar items in EconPapers)
Date: 2020-05-14
New Economics Papers: this item is included in nep-mac and nep-sea
Note: mcd58
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