Thursday, February 17, 2011

Yet Again: What Stimulus?

Not only was the fiscal stimulus applied by the US government difficult to detect in time series data (see chart), but it apparently was also pretty puny when compared to the fiscal stimulus applied by most of the rest of the world in response to the Great Recession. In fact, even though the US was one of the countries hit first and hit hardest by the financial crisis of late 2008, it enacted one of the lowest levels of fiscal stimulus of all developed countries:

Net Fiscal Stimulus During the Great Recession

Joshua Aizenman, Gurnain Kaur Pasricha
NBER Working Paper No. 16779
Issued in February 2011

This paper studies the patterns of fiscal stimuli in the OECD countries propagated by the global crisis. Overall, we find that the USA net fiscal stimulus was modest relative to peers, despite it being the epicenter of the crisis, and having access to relatively cheap funding of its twin deficits. The USA is ranked at the bottom third in terms of the rate of expansion of the consolidated government consumption and investment of the 28 countries in sample. Contrary to historical experience, emerging markets had strongly countercyclical policy during the period immediately preceding the Great Recession and the Great Recession. Many developed OECD countries had procyclical fiscal policy stance in the same periods. Federal unions, emerging markets and countries with very high GDP growth during the pre-recession period saw larger net fiscal stimulus on average than their counterparts. We also find that greater net fiscal stimulus was associated with lower flow costs of general government debt in the same or subsequent period.
There's nothing to be done about what happened in early 2009. However, this reminds us that there is one thing that bears repeating, over and over: serious fiscal stimulus was never really tried in the United States during the Great Recession.

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