Has Fiscal Policy Helped Stabilize the Postwar U.S. Economy?

Abstract.  In this paper, I consider whether postwar fiscal policy has helped stabilize the U.S. economy. I do this by adding to the stochastic growth model fiscal policy feedback rules estimated from postwar data. These rules allow fiscal policies to respond to current and lagged output and labor hours. I use the estimated policy rules to see if postwar fiscal policy reduces output volatility and/or lengthens expansions and shortens recessions. I find that fiscal policy in general provides little stability on either count. I also find that the endogenous feedback rules, by themselves, are at best moderately stabilizing and are in some cases destabilizing.

Text

  • Main Text
  • Technical Appendix on Solving Linear Expectational Difference Equations
  • Background Calculations

    • Data

  • Data Set
  • Underlying Spreadsheets (zipped)

    • Computer Code

  • Underlying Codes (in GAUSS, zipped).  Among other things, this includes an older version of the simplex maximization algorithm written by Honore and Kyriazidou and downloaded from the electronic GAUSS library at American University, and a version of the HP filter written by Matheny, Norden and Vigfusson and downloaded from Christian Zimmerman's QMRBC web site.
  • GAUSS translations of LAPACK routines for the real generalized Schur decomposition, provided by Paul Söderlind

    • Solution Method
    Everybody and their brother has their own special method for solving linear expectational difference equations.  Here's mine.

  • Technical Appendix on Solving Linear Expectational Difference Equations
  • Code:  Use the GAUSS files rgsar1.src, rgsar1.lcg, and the underlying LAPACK routines, all of which are described in the readme.txt file that accompanies the computer code.
  • My approach is based on the work of (especially) Paul Klein and Christopher Sims.  You should check out their work as well.

    • Last Updated on April 25, 2007 by John Jones