Activist Fiscal Policy to Stabilize Economic Activity

57 Pages Posted: 13 Oct 2009 Last revised: 6 Feb 2022

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

William G. Gale

Brookings Institution

Date Written: October 2009

Abstract

We review the evidence on the practice and effects of discretionary fiscal policy, particularly in the context of recent efforts to stimulate the economy, reaching two main conclusions. First, policy interventions have increased in this decade, pre-dating the 2009 stimulus. Second, despite a large economic literature on the topic, the state of theory and evidence is not as "shovel ready" as one would like. Although consumption and investment clearly respond to tax incentives and structural vector autoregressions show that lower taxes and higher government purchases can boost output, it is difficult to apply the findings in the current context, in part because multipliers and policy lags are likely to vary with economic conditions. Dynamic stochastic general equilibrium models can be adapted to address extreme economic conditions, but yield an extremely wide range of predicted impacts. The experience from large downturns - the U.S. Great Depression and the Japanese Lost Decade - is illuminating, but provides little evidence about policy effectiveness because systematic and sustained fiscal interventions were not attempted in either case.

Suggested Citation

Auerbach, Alan Jeffrey and Gale, William G., Activist Fiscal Policy to Stabilize Economic Activity (October 2009). NBER Working Paper No. w15407, Available at SSRN: https://ssrn.com/abstract=1486543

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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William G. Gale

Brookings Institution ( email )

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