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State Dependence of Fiscal Multipliers: the Source of Fluctuations Matters

Event information

Title: State Dependence of Fiscal Multipliers: the Source of Fluctuations Matters
Date and Time: Tuesday, January 14, 2019
Time: 10:40 – 12:10
Venue: Conference Room 1 on the 10th floor of Building 3 (Waseda Campus)
Presenter: Francesco Zanetti (University of Oxford)
Language: English
Open to students, faculty members, and the general public
Registration: No registration required
Organizer: Dr. Masashige Hamano ([email protected]) Organizers: Waseda Institute of Political Economy
Co-organized by the Center for Positive/Empirical Analysis of Political Economy of the Top Global University Project, Waseda University

Abstract

Abstract: We develop a general analytic theory of state-dependent fiscal multipliers in a framework featuring interaction between three empirically relevant goods market frictions: idle productive capacity, unsatisfied demand and price rigidity. 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, 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 using a novel econometric specification that allows to estimate spending and tax cut multipliers in recessionary and expansionary episodes, conditional on those being either demand- or supply-driven.

Dates
  • 0114

    TUE
    2020

Place

Conference Room 1 on the 10th floor of Building 3 (Waseda Campus)

Tags
Posted

Thu, 26 Dec 2019

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