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State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters

Wednesday 3 March 2021, 1.00PM to 2.00 pm

Speaker(s): Francesco Zanetti (Oxford)

Host: Paulo Santos Monteiro

Francesco Zanetti 3 March 2021 (PDF , 3,217kb)

Abstract: We develop a general theory of state-dependentfiscal 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 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 firms’ payroll and sales, are ineeffective 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 suffciently low. We obtain modelfree 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.




Location: ZOOM (details to follow)

Admission: All welcome