Cyclicality of U.S. Discretionary Fiscal Policy (Job Market Paper)
The literature on fiscal policy conduct has failed to yield a consensus on even the most basic aspects of policy, such as whether and how it responds to the business cycle. Conflicting results may stem in part from model uncertainty, particularly uncertainty about which covariates belong in the underlying model of fiscal policy. I estimate the response of U.S. federal discretionary policy to different business cycle measures using a Bayesian framework that explicitly accounts for model uncertainty. I find that policy is countercyclical, responding primarily to the change in the unemployment rate, and that taxes make up a larger portion of the response than spending. Distinguishing between expansions and recessions makes it clear that countercyclical policy is limited to recessions; during expansions, in contrast, policymakers are unlikely to respond to economic conditions. Finally, I find no evidence of a structural break in business cycle responses, nor of substantive differences between intended policy and actual policy outcomes.
Direct and Indirect Monetary Policy Responses to Tax and Spending Shocks
The effectiveness of fiscal policy depends critically on the central bank's response. In fact, a central bank that engages in monetary offset exactly counteracts the macroeconomic effects of fiscal shocks, rendering them an ineffective means of stabilizing the economy. In this paper I investigate empirically whether the Federal Reserve offsets fiscal policy through the estimation of a ``direct response" to tax and spending shocks that measures the federal funds rate response to a shock different from what is justified by the shock's predicted effects on the economy. I find evidence of non-offsetting behavior as well as asymmetries in the way the Federal Open Market Committee (FOMC) responds to different types of shocks. Specifically, the FOMC reinforces the anticipated effects of spending shocks, for example responding to an increase in spending by decreasing the federal funds rate, and impedes the anticipated effects of tax shocks, for example responding to a decrease in taxes by increasing the federal funds rate. The direct response to expansionary shocks is larger and more persistent than the response to contractionary shocks, as is the response to local spending relative to federal spending. My results also indicate that the direct response to tax shocks has declined in recent years while the response to spending is largely unchanged.
Works in Progress
Cyclicality of U.S. Subnational Discretionary Fiscal Policy
Subnational fiscal policy operates under markedly different conditions from federal policy. Most notably, unlike the federal government all states (except Vermont) are subject to balanced budget requirements, which limit their ability to run deficits. As a result, subnational fiscal policy is likely to be less countercyclical and more responsive to debt than federal policy. There is evidence to suggest that this was true during the Great Recession, when seemingly large stimulus by the U.S. federal government was accompanied by contractionary policy at the subnational level. This paper aims to estimate the response of subnational fiscal policy to business cycle measures using Bayesian techniques that incorporate uncertainty about the underlying model of fiscal policy.