Desperate Times Call for Desperate Measures: Government Spending Multipliers in Hard Times

Sokbae Lee; Yuan Liao; Myung Hwan Seo; Youngki Shin

doi:10.1111/ecin.12919

Desperate Times Call for Desperate Measures: Government Spending Multipliers in Hard Times

Sokbae Lee
, Yuan Liao
, Myung Hwan Seo
, Youngki Shin^*

^*Corresponding author for this work

Research output: Contribution to journal › Journal Article › peer-review

6 Citations (Scopus)

Abstract

We investigate state-dependent effects of fiscal multipliers and allow for endogenous sample splitting to determine whether the U.S. economy is in a slack state. When the endogenized slack state is estimated as the period of the unemployment rate higher than about 12%, the estimated cumulative multipliers are significantly larger during slack periods than nonslack periods and are above unity. We also examine the possibility of time-varying regimes of slackness and find that our empirical results are robust under a more flexible framework. Our estimation results point out the importance of the heterogenous effects of fiscal policy and shed light on the prospect of fiscal policy in response to economic shocks from the current COVID-19 pandemic. (JEL C32, E62, H20, H62).

Original language	English
Pages (from-to)	1949-1957
Number of pages	9
Journal	Economic inquiry
Volume	58
Issue number	4
Early online date	8 Jul 2020
DOIs	https://doi.org/10.1111/ecin.12919
Publication status	Published - 1 Oct 2020
Externally published	Yes

Bibliographical note

Publisher Copyright:
© 2020 The Authors. Economic Inquiry published by Wiley Periodicals LLC on behalf of Western Economic Association International.

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Cite this

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title = "Desperate Times Call for Desperate Measures: Government Spending Multipliers in Hard Times",

abstract = "We investigate state-dependent effects of fiscal multipliers and allow for endogenous sample splitting to determine whether the U.S. economy is in a slack state. When the endogenized slack state is estimated as the period of the unemployment rate higher than about 12\%, the estimated cumulative multipliers are significantly larger during slack periods than nonslack periods and are above unity. We also examine the possibility of time-varying regimes of slackness and find that our empirical results are robust under a more flexible framework. Our estimation results point out the importance of the heterogenous effects of fiscal policy and shed light on the prospect of fiscal policy in response to economic shocks from the current COVID-19 pandemic. (JEL C32, E62, H20, H62).",

author = "Sokbae Lee and Yuan Liao and Seo, \{Myung Hwan\} and Youngki Shin",

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T1 - Desperate Times Call for Desperate Measures: Government Spending Multipliers in Hard Times

AU - Lee, Sokbae

AU - Liao, Yuan

AU - Seo, Myung Hwan

AU - Shin, Youngki

PY - 2020/10/1

Y1 - 2020/10/1

N2 - We investigate state-dependent effects of fiscal multipliers and allow for endogenous sample splitting to determine whether the U.S. economy is in a slack state. When the endogenized slack state is estimated as the period of the unemployment rate higher than about 12%, the estimated cumulative multipliers are significantly larger during slack periods than nonslack periods and are above unity. We also examine the possibility of time-varying regimes of slackness and find that our empirical results are robust under a more flexible framework. Our estimation results point out the importance of the heterogenous effects of fiscal policy and shed light on the prospect of fiscal policy in response to economic shocks from the current COVID-19 pandemic. (JEL C32, E62, H20, H62).

AB - We investigate state-dependent effects of fiscal multipliers and allow for endogenous sample splitting to determine whether the U.S. economy is in a slack state. When the endogenized slack state is estimated as the period of the unemployment rate higher than about 12%, the estimated cumulative multipliers are significantly larger during slack periods than nonslack periods and are above unity. We also examine the possibility of time-varying regimes of slackness and find that our empirical results are robust under a more flexible framework. Our estimation results point out the importance of the heterogenous effects of fiscal policy and shed light on the prospect of fiscal policy in response to economic shocks from the current COVID-19 pandemic. (JEL C32, E62, H20, H62).

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DO - 10.1111/ecin.12919

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SN - 0095-2583

VL - 58

SP - 1949

EP - 1957

JO - Economic inquiry

JF - Economic inquiry

IS - 4

ER -

Desperate Times Call for Desperate Measures: Government Spending Multipliers in Hard Times

Abstract

Bibliographical note

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