State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters

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. We 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.

Date et heure: 
Jeudi 07 avril 2022, 16:30
Organisation: 
Banque nationale de Belgique, KU Leuven, UAntwerpen, UCLouvain, UGent, ULB, ULiège et UNamur
Orateur(s): 
Francesco Zanetti
Lieu: 
Auditorium de la Banque nationale de Belgique (Salle A), rue Montagne aux Herbes potagères 61, Bruxelles / Microsoft Teams Meeting
Prix d'inscription: 
gratuit