Fiscal Multipliers in Recessions

By Matthew Canzoneri, Fabrice Collard, Harris Dellas and Behzad Diba

http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1204&r=dge

The Great Recession, and the fiscal response to it, has revived interest in the size of fiscal multipliers. Standard business cycle models have difficulties generating multipliers greater than one. And they also fail to produce any significant asymmetry in the size of the multipliers over the business cycle. In this paper we employ a variant of the Curdia-Woodford model of costly financial intermediation to show that fiscal multipliers are strongly countercyclical. In particular, they can take values exceeding two during recessions, declining to values below one during expansions.

State-dependent fiscal multipliers: now we are talking about the potential of substantial welfare gains to proactive fiscal policy, if you believe business cycles bear important welfare costs and fiscal policy can be enacted fast. The crucial aspect here is that financial frictions vary through the business cycle in plausible ways.

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2 Responses to Fiscal Multipliers in Recessions

  1. M. H. says:

    You could also have selected the paper about how DSGE models have a downward biases on such multipliers. It was in the same NEP-DGE issue, and Economic Logic blogged about it: link.

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