Is Fiscal Policy More Effective During Recessions?

Abstract This article estimates the impact of government spending shocks on economic activity during periods of boom and recession. I estimate these effects using an eclectic approach that employs (i) different strategies to identify exogenous variation in government spending, (ii) different methods to compute dynamic responses, and (iii) different measures of the state of business cycles. I find that government spending shocks have larger impacts on output during expansions than during recessions. Importantly, I explore the reasons why my results differ from other work in the literature and highlight the empirical implications of the information used to define periods of recession.