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Article Artículo

Economic Growth

Government

Have Economists Underestimated the Impact of Fiscal Stimulus?

The effects of fiscal policy on growth and employment are central to the debate on deficit reduction and stimulus. Unfortunately, there are sharp divisions among economists over the size of fiscal multipliers.

A major problem is identifying deliberate changes in fiscal policy, since the size of the budget deficit is in large part dependent on the state of the economy. Therefore it is necessary to find a way to distinguish between changes in the deficit that are the result of cyclical fluctuations and changes that are attributable to conscious policy.

Several identification schemes have been used to resolve the issue of endogeneity regarding the business cycle in fiscal multiplier estimations, among them a measure of the cyclically adjusted budget deficit, the cyclically adjusted primary balance (CAPB) in event studies (Alesina and Ardagna 2010), as well as the recursive approach (Fatás and Mihov 2001) and the one by Blanchard and Perotti (2002) in structural vector autoregressive (SVAR) models. However, adjusting for business cycle movements may not be enough in the presence of pronounced asset and credit market movements that influence the budget and GDP over and above what is generally recognized as business cycle swings.

Dean Baker, Sebastian Gechert, Rafael Mentges and / December 18, 2013