Decomposing the Fiscal Multiplier

James Cloyne, Oscar Jorda and Alan Taylor

No 2020-12, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Unusual circumstances often coincide with unusual fiscal policy actions. Much attention has been paid to estimates of how fiscal policy affects the macroeconomy, but these are typically average treatment effects. In practice, the fiscal “multiplier” at any point in time depends on the monetary policy response. Using the IMF fiscal consolidations dataset for identification and a new decomposition-based approach, we show how to evaluate these monetary-fiscal effects. 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. We show how to decompose the typical macro impulse response function into (1) the direct effect of the intervention on the outcome; (2) the indirect effect due to changes in how other covariates affect the outcome when there is an intervention; and (3) a composition effect due to differences in covariates between treated and control subpopulations. This Blinder-Oaxaca-type decomposition provides convenient way to evaluate the effects of policy, state-dependence, and balance conditions for identification.

Keywords: 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)
Pages: 41
Date: 2020-03-27
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-pub
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Citations: View citations in EconPapers (12)

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Working Paper: Decomposing the Fiscal Multiplier (2020)
Working Paper: Decomposing the Fiscal Multiplier (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:87713

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DOI: 10.24148/wp2020-12

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