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Journal Article
Recent and Near-Term Fiscal Policy: Headwind or Tailwind?
The federal government routinely uses government spending and taxes to help offset the highs and lows of the U.S. business cycle. While government spending typically increases during a recession, the magnitude of the fiscal expansion during the pandemic recession was outsized compared with the average historical pattern. This likely contributed to real economic growth and possibly inflation during the recovery. Over the next few years, U.S. fiscal policy is expected to be roughly neutral, providing neither a tailwind nor headwind to the overall economy.
Working Paper
The Heterogeneous Effects of Government Spending : It’s All About Taxes
This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger ...
Working Paper
Search Complementarities, Aggregate Fluctuations, and Fiscal Policy
We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active equilibrium with strong joint venture formation, large output, and low unemployment coexists with a passive equilibrium with low joint venture formation, low output, and high unemployment. {{p}} Changes in fundamentals move the system between the two equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each equilibrium. Sufficiently adverse ...
Working Paper
Estimating the Missing Intercept
Cross-sectional data have proven to be increasingly useful for macroeconomic research. However, their use often leads to the 'missing intercept' problem in which aggregate general equilibrium effects and policy responses are absorbed into fixed effects. We present a statistical approach to jointly estimate aggregate and idiosyncratic effects within a panel framework, leveraging identification strategies coming from both cross-sectional or time-series settings. We then apply our methodology to study government spending multipliers (Nakamura and Steinsson, 2014) and wealth effects from stock ...
Working Paper
Macroeconomic Effects of Government Spending in China
Government spending plays an important role in determining economic performances in China. Its macroeconomic effects are analyzed in this paper. We show that government spending in China (i) Granger-causes output, consumption and investment booms as well as inflation and (ii) has a multiplier larger than 1. The large multiplier effects are found not only in aggregate time-series data but also in panel data at the provincial level. We also provide a theoretical model and Monte Carlo analysis to rationalize our empirical findings. Our theoretical and Monte Carlo analyses support the large ...
Working Paper
Debt and Stabilization Policy: Evidence from a Euro Area FAVAR
The Euro-area poses a unique problem in evaluating policy: a currency union with a shared monetary policy and country-specific fiscal policy. Analysis can be further complicated if high levels of public debt affect the performance of stabilization policy. We construct a framework capable of handling these issues with an application to Euro-Area data. In order to incorporate multiple macroeconomic series from each country but, simultaneously, treat country-specific fiscal policy, we develop a hierarchical factor-augmented VAR with zero restrictions on the loadings that yield country-level ...
Working Paper
The Aggregate and Relative Economic Effects of Government Financed Health Care
Government-financed health care (GFHC) expenditures, through Medicare and Medicaid, have grown from roughly zero to over 7.6 percent of national personal income over the past 50 years. Recently, some analysts (e.g., the Council of Economics Advisers (2014)) have argued that an expansion of GFHC (in particular Medicaid) has large positive employment effects. Using quarterly data for 1978:Q2-2016:Q4, this paper estimates the impact of GFHC spending on prime-age employment using an instrumental variables strategy that exploits exogenous variation in Medicare spending. Our IV estimate of the ...
Working Paper
Sticky Wages, Monetary Policy and Fiscal Policy Multipliers
This paper demonstrates how adding nominal wage rigidity to a standard sticky price model can create a mechanism by which increases in government spending cause increases in consumption. The increase in output arising from government purchases puts upward pressure on the price level. At a fixed short-run nominal wage, this bids down the real wage, which leads producers to increase labor demand. Increased labor demand allows households to both finance the tax bill associated with the government spending as well as increase their own consumption. Our approach does not rely upon existing ...
Working Paper
Optimal Government Spending at the Zero Lower Bound: A Non-Ricardian Analysis
This paper analyzes the implications of distortionary taxation and debt financing for optimal government spending policy in a sticky-price economy where the nominal interest rate is subject to the zero lower bound constraint. Regardless of the type of tax available and the initial debt level, optimal government spending policy in a recession is characterized by an initial increase followed by a reduction below, and an eventual return to, the steady state. The magnitude of variations in the government spending as well as their welfare implications depend importantly on the available tax ...