Working Paper: CEPR ID: DP14544
Authors: James S. Cloyne; Oscar Jorda; Alan M. Taylor
Abstract: The fiscal “multiplier” measures how many additional dollars of output are gained or lost for each dollar of fiscal stimulus or contraction. In practice, the multiplier at any point in time depends on the monetary policy response and existing conditions in the economy. Using the IMF fiscal consolidations dataset for identification and a new decomposition-based approach, we show how to quantify the importance of thesemonetary-fiscal interactions. In the data, the fiscal multiplier varies considerably with monetary policy: it can be zero, or as large as 2 depending on the monetary offset. More generally, we show how to decompose the typical macro impulse response function by extending local projections to carry out the well-known Blinder-Oaxaca decomposition. This provides a convenient way to evaluate the effects of policy, state-dependence, and balance conditions for identification.
Keywords: Fiscal multiplier; Monetary offset; Blinder-Oaxaca decomposition; Local projections; Interest rates; Fiscal policy; State-dependence; Balance identification
JEL Codes: C54; C99; E32; E62; H20; H5; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal Policy Interventions (E62) | GDP (E20) |
| Monetary Policy Response (E52) | Fiscal Multiplier (E62) |
| Monetary Accommodation (limited) (E49) | Large Fiscal Multipliers during Fiscal Contractions (E62) |
| Monetary Policy Regime (E63) | Fiscal Multiplier (E62) |
| Fiscal Shocks (H39) | Fiscal Multiplier (E62) |