Working Paper: NBER ID: w4765
Authors: Christina D. Romer; David H. Romer
Abstract: This paper analyzes the contributions of monetary and fiscal policy to postwar economic recoveries. We find that the Federal Reserve typically responds to downturns with prompt and large reductions in interest rates. Discretionary fiscal policy, in contrast, rarely reacts before the trough in economic activity, and even then the responses are usually small. Simulations using multipliers from both simple regressions and a large macroeconomic model show that the interest rate falls account for nearly all of the above-average growth that occurs early in recoveries. Our estimates also indicate that on several occasions expansionary policies have contributed substantially to above-normal growth outside of recoveries. Finally, the results suggest that the persistence of aggregate output movements is largely the result of the extreme persistence of the contribution of policy changes.
Keywords: Monetary Policy; Fiscal Policy; Economic Recovery; Recession
JEL Codes: E32; E52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Economic recovery (E65) |
| Interest rate reductions (E43) | Economic recovery (E65) |
| Monetary policy (E52) | Persistence of output movements (C69) |
| Fiscal policy (E62) | Economic recovery (E65) |
| Policy changes (J18) | Economic performance (P17) |