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Report

How stabilizing has fiscal policy been?

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Abstract

This paper investigates the cyclicality of fiscal policy over the past 40 years, using a measure that weights the changes in the components of fiscal policy by their likely impact on the economy. Fiscal policy has been strongly countercyclical over the past four decades, with the degree of cyclicality somewhat stronger in the past 20 years than the previous 20. Automatic stabilizers, mostly through the tax system and unemployment insurance, provide roughly half the stabilization, with discretionary fiscal policy in the form of enacted tax cuts and increased spending accounting for the other half. Fiscal policy at the federal level accounts for all the stabilization. State fiscal policy has been very mildly procyclical in downturns, on average, as declines in state and local purchases have more than offset the stimulus provided by state and local tax systems.

Authors

Michael Ng

Research Analyst - Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution

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