The timing of fiscal stimulus
Berge and al. have compared the effect of fiscal spending on economic activity across four phases of the business cycle. They show that the fiscal multiplier is higher when unemployment is increasing than when it is decreasing. The implication is that fiscal intervention early on in economic downturns is most effective at stabilizing output. So will the fiscal stimulus packages implemented by the governments of advanced economies to mitigate the negative COVID shock be effective?
In summary, the existing evidence suggests that the recent increases in spending will be effective. That is, of course, subject to the caveat that today’s circumstances are unique, and only future research can analyse the actual effect of current measures on growth. As a consequence of social distancing, a considerable fraction of services cannot be consumed, regardless of increases in fiscal spending. That may limit the ability of fiscal spending to raise private consumption while a lockdown is in place. It seems likely, however, that future consumer spending will increase as a consequence of the current measures. That will stimulate recovery as lockdowns are gradually eased across Europe.
Government Expenditures During the Coronavirus Pandemic Have a Large Positive Effect on Economic Growth
When is the Fiscal Multiplier High? A Comparison of Four Business Cycle Phases
Authors: Travis Berge, Maarten De Ridder, Damjan Pfajfar
From: Federal Reserve Board, Cambridge University
Taking into consideration heterogeneity
Flynn and al. build a semi-structural model that incorporates rich heterogeneity among and between households and firms. On the household side, heterogeneity is defined in terms of their marginal propensity to consume (MPC) and their consumption of different goods. On the firms side, they allow for a large number of sectors and regions, linked to one another through an arbitrary input-output structure. Finally, household employment across the different firms is set to vary. They find that:
- Depending on which industries and regions are shocked, the shock amplification differs by a factor of six;
- This heterogeneity is driven by differences in worker MPC and labor shares, and is attenuated by input-output linkages;
- Fiscal policy that targets households based on their MPCs is
close to maximally expansionary and optimal.
Shock Propagation and the Fiscal Multiplier: the Role of Heterogeneity
Authors: Joel P. Flynn, Christina Patterson, John Sturm
From: MIT, Northwestern University
The evidence so far
Daniel Wilson argues that there are three reasons why the fiscal stimulus in the US is likely to boost output:
- First, the marginal propensity to consume out of individual transfers is particularly high when unemployment is high and liquidity constraints bind, implying fiscal multipliers near or above one;
- Second, the marginal propensities to spend out of federal transfers by state and local governments are particularly high during times of fiscal strain;
- Third, the fiscal multiplier on government spending when monetary policy is by the zero lower bound is around 1.5.
The COVID-19 Fiscal Multiplier: Lessons from the Great Recession
By: Daniel J. Wilson – Federal Reserve Bank of San Francisco
