Working Paper: NBER ID: w9306
Authors: Alan J. Auerbach
Abstract: This paper reviews the state of discretionary fiscal policy. Among its findings are: (1) In recent years, U.S. discretionary fiscal policy appears to have become more active in response to both cyclical conditions and a simple measure of budget balance. (2) Considerable uncertainty remains about how large an impact discretionary fiscal policy has on output. (3) There is little evidence that discretionary fiscal policy has played an important stabilization role during recent decades. (4) Budgetary pressure may weaken the efficacy of expansionary fiscal policy. Conversely, contractionary fiscal policy might have a salutary effect on output. This possibility may be relevant for understanding the impact of fiscal policy in the 1990s, although the mechanism is unclear. (5) The automatic stabilizers embedded in the fiscal system have experienced little net change since the 1960s and have contributed to cushioning cyclical fluctuations. But the tax system has many attributes that weaken its potential role as an automatic stabilizer, particularly with respect to investment. (6) The government's reported fiscal position, to which fiscal policy appears responsive, represents a very poor measure of underlying fiscal balance.
Keywords: No keywords provided
JEL Codes: E62; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Discretionary fiscal policy (E62) | Output (Y10) |
| GDP gap (E20) | Full-employment surplus (E24) |
| National debt (H63) | Budget surpluses (H62) |
| Budgetary pressure (H61) | Efficacy of expansionary fiscal policy (E62) |
| Contractionary fiscal policy (E62) | Output (Y10) |
| Automatic stabilizers (E63) | Cyclical fluctuations (E32) |
| Fiscal position (H68) | Underlying fiscal balance (H68) |