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Is Fiscal Policy More Effective During Cyclical Downturns?

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  • Georgios Karras

Abstract

Using a panel data set of 61 countries for the 1952-2007 period, the paper shows that fiscal policy is more potent during downturns than during expansions, and that the difference is substantial: the fiscal multiplier is twice as large when output is below its long-term trend. In particular, the empirical results suggest that during expansions the output 'multiplier' is less than one, private consumption is crowded out, and the response of investment is weak; whereas during downturns the output multiplier is greater than one, private consumption is not crowded out, and the response of investment is strong. Differences between expansion and downturn multipliers are found to be greater in low-income countries.

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  • Georgios Karras, 2014. "Is Fiscal Policy More Effective During Cyclical Downturns?," International Economic Journal, Taylor & Francis Journals, vol. 28(2), pages 255-271, June.
    • Handle: RePEc:taf:intecj:v:28:y:2013:i:2:p:255-271
    DOI: 10.1080/10168737.2013.825304
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    Cited by:

    1. Ashima Goyal & Bhavyaa Sharma, 2015. "Government expenditure in India: Composition, cyclicality and multipliers," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2015-032, Indira Gandhi Institute of Development Research, Mumbai, India.
    2. Rabia Rafique & Asad Nisar & Syed Sadaqat Ali Shah, 2024. "Testing the effects of fiscal policy shocks on output growth in recession and expansion: empirical evidence from developing countries," Economic Change and Restructuring, Springer, vol. 57(3), pages 1-26, June.
    3. Ashima Goyal & Bhavyaa Sharma, 2018. "Government Expenditure in India: Composition and Multipliers," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 47-85, December.

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