Fiscal Policy and Economic Recovery

Romer, Christina D.
July 2009
Business Economics;Jul2009, Vol. 44 Issue 3, p132
Academic Journal
The American Recovery and Reinvestment Act of 2009 is the biggest, boldest countercyclical fiscal stimulus in American history. What is its likely impact? Current econometric models indicate that a tax cut is likely to have a multiplier of about 1.0 and that spending has a multiplier of about 1.6 after about 18 months. Even the most sophisticated econometric analysis, however, suffers from "omitted variable" bias. In trying to take account of this, David Romer and I have found that the tax multiplier is more likely to be around two to three," and we suspect that the spending multiplier is correspondingly higher than the conventional estimates. Of course, every recession is different. The unique factors of this recession are analyzed to determine whether the multipliers are likely to deviate from historical averages.


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