Working Paper: CEPR ID: DP16754
Authors: Alan J. Auerbach; Yuriy Gorodnichenko; Peter McCrory; Daniel P. Murphy
Abstract: In response to the record-breaking COVID19 recession, many governments have adopted unprecedented fiscal stimuli. While countercyclical fiscal policy is effective in fighting conventional recessions, little is known about the effectiveness of fiscal policy in the current environment with widespread shelter-in-place (“lockdown”) policies and the associated considerable limits on economic activity. Using detailed regional variation in economic conditions, lockdown policies, and U.S. government spending, we document that the effects of government spending were stronger during the peak of the pandemic recession, but only in cities that were not subject to strong stay-at-home orders. We examine mechanisms that can account for our evidence and place our findings in the context of other recent evidence from microdata.
Keywords: COVID-19; Fiscal Multiplier; Stimulus
JEL Codes: E62; E32; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government spending during the peak of the pandemic recession (H56) | Employment in cities not subject to SAH orders (J68) |
| Restrictions that prevent matching between workers and employers (J68) | Lack of employment response in locked-down cities (J68) |
| DoD spending (H56) | Local consumption (D10) |
| Fiscal stimulus can remove slack in the economy (E62) | Effectiveness limited in restricted economies (P19) |