How much does GDP rise following a government spending increase by a dollar? This question – the size of the fiscal multiplier – has been important for two reasons: first, the nominal interest rate hits the zero lower bound in the advanced economies for a long period when they were recovering from the global financial crisis in 2008. Second, in the fiscal consolidation debate, does shrinking fiscal spending shrink or expand economic output of a country?
In this Nottingham School of Economics working paper Kevin Lee, James Morley, Kian Ong and Kalvinder Shields distinguish the effects of fiscal initiatives and fiscal reactions in measuring the fiscal multiplier. This is only possible using the successive budget statements released annually by the Office of Management and Budget in the U.S., that contains both planned and actual government spending. The effects of fiscal initiatives on the economy are substantially larger than the effects of fiscal reactions; and the fiscal initiatives undertaken following the crisis of 2008 (the American Recovery and Reinvestment Act of 2009) mitigated the recessions in the U.S.
CFCM discussion paper 18/10: Measuring the fiscal multiplier when plans take time to implement, by Kevin Lee, James Morley, Kian Ong and Kalvinder Shields.
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Kevin Lee, James Morley, Kian Ong and Kalvinder Shields
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Posted on Wednesday 7th November 2018