DP14544 Decomposing the Fiscal Multiplier

Author(s): James Cloyne, Óscar Jordá, Alan M. Taylor
Publication Date: March 2020
Date Revised: September 2020
Keyword(s): balance, Blinder-Oaxaca decomposition, Fiscal Multiplier, Fiscal policy, identification, interest rates, local projections, monetary offset, State-Dependence
JEL(s): C54, C99, E32, E62, H20, H5, N10
Programme Areas: Economic History, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14544

The fiscal "multiplier" measures how many additional dollars of output are gained or lost for each dollar of fiscal stimulus or contraction. In practice, the multiplier at any point in time depends on the monetary policy response and existing conditions in the economy. Using the IMF fiscal consolidations dataset for identification and a new decomposition-based approach, we show how to quantify the importance of these monetary-fiscal interactions. In the data, the fiscal multiplier varies considerably with monetary policy: it can be zero, or as large as 2 depending on the monetary offset. More generally, we show how to decompose the typical macro impulse response function by extending local projections to carry out the well-known Blinder-Oaxaca decomposition. This provides a convenient way to evaluate the effects of policy, state-dependence, and balance conditions for identification.