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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 €scal multipliers in a framework featuring interaction between two empirically relevant goods market frictions: idle productive capacity and unsatis€ed demand. Our key novel fi€nding is that the source of economic ƒuctuations determines the cyclicality of €scal multipliers. Policies that stimulate aggregate demand, such as government spending and consumption tax cuts, have multipliers that are large in demanddriven 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 €rms’ payroll and sales, are ine‚ective in demanddriven 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 su ciently low. We obtain modelfree empirical support for our theoretical predictions by using a novel econometric speci€cation 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; €scal 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
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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) Downloads
Working Paper: State Dependence of Fiscal Multipliers: the Source of Fluctuations Matters (2022) Downloads
Working Paper: State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters (2022) Downloads
Working Paper: STATE DEPENDENCE OF FISCAL MULTIPLIERS: THE SOURCE OF FLUCTUATIONS MATTERS (2022) Downloads
Working Paper: State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters (2021) Downloads
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