Fiscal and Monetary Policy During Downturns: Evidence From the G7

Author/Editor:

Sven Jari Stehn ; Daniel Leigh

Publication Date:

March 1, 2009

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper analyzes how fiscal and monetary policy typically respond during downturns in G7 countries. It evaluates whether discretionary fiscal responses to downturns are timely and temporary, and compares the response of fiscal policy to that of monetary policy. The results suggest that while responding more weakly and less quickly than monetary policy, discretionary fiscal policy is more timely than conventional wisdom would suggest, particularly in “Anglo-Saxon” countries, but the response differs substantially across fiscal instruments. Both fiscal and monetary policy are found to be subject to an easing bias, with more easing during downturns than tightening during upturns; and liable to easing in response to erroneously perceived downturns, many of which are subsequently revised to expansions.

Series:

Working Paper No. 2009/050

Subject:

Current spending Expenditure Fiscal policy Fiscal stance Fiscal stimulus Output gap Production

English

Publication Date:

March 1, 2009

ISBN/ISSN:

9781451871982/1018-5941

Stock No:

WPIEA2009050

Pages:

23

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