Fiscal policy in good and bad times |
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Authors: | Bertrand Candelon Lenard Lieb |
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Institution: | 1. Department of Economics, Deakin University, 221 Burwood Highway, Burwood, Victoria 3125 Australia;2. Department of Economics, College of Business Administration, University of Nebraska-Omaha, Omaha, NE 68182-0048, USA;3. School of Business and Economics, Loughborough University, Leicestershire LE11 3TU, UK\n |
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Abstract: | In this paper we analyze whether the effect of fiscal policy differs across the business cycle. To tackle this question, we use a regime-switching error-correction framework, where nonlinearities are only modeled in the short-run and have no impact on the long-run equilibrium. Regime specific shocks to government revenue and government purchases are identified using sign restrictions. Linear combinations of the impulse responses of these basic shocks are used to construct a deficit-spending shock and a deficit-financed tax-cut shock. We find that active spending policies have a stronger impact in recession, with multipliers exceeding unity, and should be preferred to deficit-financed tax-cuts. |
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Keywords: | Fiscal policy Nonlinearity Threshold vector error-correction |
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