Working Paper: CEPR ID: DP17903
Authors: James S. Cloyne; Oscar Jorda; Alan M. Taylor
Abstract: An impulse response is the dynamic average effect of an intervention across horizons. We use the well-known Kitagawa-Blinder-Oaxaca decomposition to explore a response’s heterogeneity over time and over states of the economy. This can be implemented with a simple extension to the usual local projection specification that nevertheless keeps the model linear in parameters. Using our new decomposition-based approach, we show how to unpack heterogeneity in the fiscal multiplier, an object that at any point in time may depend on a number of potentially correlated factors, including existing economic conditions and the monetary response. In our application, the fiscal multiplier varies considerably with monetary policy: it can be as small as zero, or as large as 2, depending on the degree of monetary offset.
Keywords: fiscal multiplier; monetary offset; Kitagawa-Blinder-Oaxaca decomposition; local projections; interest rates; fiscal policy; state-dependence
JEL Codes: C54; C99; E32; E62; H20; H5
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 accommodation (E52) | Fiscal multiplier (E62) |
| Fiscal interventions (H39) | Indirect effect arising from interactions with monetary policies (E49) |
| Fiscal interventions (H39) | Composition effect due to imperfect identification (C50) |
| Responsiveness of monetary policy to fiscal changes (E63) | Indirect effect of fiscal interventions (H31) |
| Economic conditions (E66) | Impact of fiscal interventions (E62) |