Title: On the way out of a recession
Authors: Stephen Nicar - Franklin and Marshall College (United States) [presenting]
Abstract: The recession that occurred in the United States from 2007 through 2009, along with the sluggish recovery since, has generated a spirited debate among policy makers and academics on the desirability and effects of fiscal policy. A central question that has emerged from this debate is whether the size of the multiplier on fiscal policy varies across the business cycle. Recent theoretical and empirical work provides evidence that it does. Almost all of the theoretical work has focused on how the zero bound on nominal interest rates may result in non-linear effects of fiscal policy, while much of the empirical work supports the idea that non-linearities may arise under less restrictive circumstances. One drawback of many of these empirical studies is that the results are not motivated by an alternative theory of the mechanism through which fiscal policy effects vary across the cycle. A notable exception within the theoretical literature is a model previously developed by Michaillat that provides a labor-market mechanism for different government spending multipliers across the business cycle. While Michaillat's model is consistent with the existing empirical evidence, the mechanism it proposes has not been tested explicitly. We propose fill this gap in the literature, evaluating the model with respect to the U.S. using a Bayesian mixed-frequency VAR.