State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters

Mishel Ghassibe () and Francesco Zanetti
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Mishel Ghassibe: National Bank of Ukraine

No 01/2021, Working Papers from National Bank of Ukraine

Abstract: We develop a general theory of state-dependent fiscal multipliers in a framework featuring interaction between two empirically relevant goods market frictions: idle productive capacity and unsatisfied demand. Our key novel finding is that the source of economic fluctuations determines the cyclicality of fiscal multipliers. Policies that stimulate aggregate demand, such as government spending and consumption tax cuts, have multipliers that are large in demand-driven recessions, but small and possibly negative in supply-driven downturns. On the other hand, policies that boost aggregate supply, such as cuts in taxes on labor income and firms' payroll and sales, are ineffective in demand-driven recessions, but powerful if the downturn is driven by supply factors. Spending austerity, implemented by a reduction in government consumption, can be the policy with the largest multiplier in severe supply-side recessions and demand-driven booms, provided elasticities of labor demand and supply are sufficiently low. Authors obtain model-free empirical support for our theoretical predictions by using a novel econometric specification that allows us to estimate spending and tax cut multipliers in recessionary and expansionary episodes, conditional on those being either demand- or supply-driven.

Keywords: business cycle; fiscal multipliers; state dependence; search-and-matching in the goods market (search for similar items in EconPapers)
JEL-codes: E32 E62 J64 (search for similar items in EconPapers)
Pages: 109 pages
Date: 2021-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: State dependence of fiscal multipliers: the source of fluctuations matters (2022)
Working Paper: State Dependence of Fiscal Multipliers: the Source of Fluctuations Matters (2022)
Working Paper: State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters (2022)
Working Paper: State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters (2022)
Working Paper: State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters (2021)
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