Decomposing the Fiscal Multiplier

Alan Taylor, James Cloyne and Oscar Jorda

No 14544, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The fiscal “multiplier†measures how many additional dollars of output are gained or lost for each dollar of fiscal stimulus or contraction. In practice, the multiplier at any point in time depends on the monetary policy response and existing conditions in the economy. Using the IMF fiscal consolidations dataset for identification and a new decomposition-based approach, we show how to quantify the importance of these monetary-fiscal interactions. In the data, the fiscal multiplier varies considerably with monetary policy: it can be zero, or as large as 2 depending on the monetary offset. More generally, we show how to decompose the typical macro impulse response function by extending local projections to carry out the well-known Blinder-Oaxaca decomposition. This provides a convenient way to evaluate the effects of policy, state-dependence, and balance conditions for identification.

Keywords: Fiscal multiplier; Monetary offset; Blinder-oaxaca decomposition; Local projections; Interest rates; Fiscal policy; State-dependence; Balance; Identification (search for similar items in EconPapers)
JEL-codes: C54 C99 E32 E62 H20 H5 N10 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Decomposing the Fiscal Multiplier (2020)
Working Paper: Decomposing the Fiscal Multiplier (2020)
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