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The Impact Of Fiscal Policy On Economic Activity Over The Business Cycle - Evidence From A Threshold VAR Analysis

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Executive Summary

Does the state of the business cycle matter for the effects of fiscal policy shocks on GDP? This paper analyses quarterly German data from 1976 to 2009 in a threshold SVAR, expanding the SVAR approach by Blanchard and Perotti (2002). In a linear benchmark SVAR, the analysis finds that hiking spending yields a short-term fiscal multiplier of around 0.70, while the fiscal multiplier resulting from an increase in taxes and social security contributions is -0.66. In addition, the threshold model derives fundamentally new insights on the effects of shocks, depending on when in the business cycle they occur, their size and their direction.

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