Must-Read: David Cashin et al.: Fiscal Policy Changes and Aggregate Demand in the U.S. Before, During and Following the Great Recession

Must-Read: A very nice exercise. The only complaint I have with the paper is that I do wish they would highlight the comparison of their measure to NIPA government purchases–where is it different, how is it different, why is it different, etc.?

David Cashin, Jamie Lenney, Byron Lutz and William Peterman: Fiscal Policy Changes and Aggregate Demand in the U.S. Before, During and Following the Great Recession: “We examine the effect of federal and subnational fiscal policy changes on aggregate demand in the U.S….

…by introducing the fiscal effect (FE) measure. FE can be decomposed into three components. Discretionary FE quantifies the effect of discretionary or legislated policy changes. Cyclical FE captures the effect of the automatic stabilizers—changes in government taxes and spending arising from the business cycle. Residual FE measures the effect of all changes in government revenues and outlays which cannot be categorized as either discretionary or cyclical; for example, it captures the effect of the secular increase in entitlement program spending due to the aging of the population.

We use FE to examine the contribution of fiscal policy changes to growth in real GDP over the course of the Great Recession and current expansion. We compare this contribution to the contributions to growth in aggregate demand made by fiscal policy changes over past expansions. In doing so, we highlight that the strong support of government policy to GDP growth during the Great Recession was followed by a historically weak contribution over the course of the current expansion.