Working Paper: NBER ID: w26939
Authors: James S. Cloyne; Oscar Jord; Alan M. Taylor
Abstract: The fiscal “multiplier” seeks to measure how many additional dollars of output are gained or lost for each dollar of fiscal expansion 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 these monetary-fiscal interactions. In the data, the fiscal multiplier varies considerably with monetary policy: it can be as small as 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 Kitagawa-Blinder-Oaxaca decomposition. This provides a convenient way to evaluate the effects of policy, state-dependence, time-variation, and the balance conditions for identification.
Keywords: fiscal multiplier; monetary policy; local projections; Kitagawa-Blinder-Oaxaca decomposition
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 response (E62) | Fiscal multiplier (E62) |
| Monetary policy response (E52) | Fiscal multiplier (E62) |
| Limited monetary accommodation (E49) | Larger fiscal multiplier (E62) |
| Monetary regime (E42) | Fiscal multiplier (E62) |
| Fiscal interventions (H39) | Direct, indirect, and composition effects (C39) |