The Effects of Fiscal Stimulus: A Cross-Country Perspective

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In this report, we exploit cross-country variation in the extent of stimulus to explore how gross domestic product (GDP) responds to stimulus. The literature on the impact of stimulus tends to examine particular episodes or countries and has not systematically taken advantage of cross-country variation. The world economic crisis of 2008-9 provides a unique opportunity to explore the impact of stimulus as many countries have instituted stimulus policies in response to the crisis. The results can help provide rough estimates of the total impact of stimulus on an economy and provide context to analysis of a particular program or model-based analysis.

Countries have different steady state growth rates and have experienced the shock of this crisis to different degrees, so a key element of analysis will be to build a counterfactual. What would we expect to have happened to countries’ economies absent a stimulus? We rely on private sector forecasts made in November of 2008 as a measure of GDP expectations prior to the announcement of stimulus plans, but after the shock of the current crisis had begun and forecasters were aware that second quarter growth would be lower than a typical quarter. As a robustness check, we also explore a simple time series forecasting model to predict a "no-stimulus" growth rate across countries. Results using this method are consistent with the main results.

The evidence suggests that countries that did larger stimulus in 2009 had better GDP performance in the second quarter of 2009 than would have been expected. The relationship between "beating expectations" and stimulus looks even stronger when the sample is limited to OECD countries (where the economies are more similar). It should be noted, though, this is a simple bivariate relationship. If monetary policy stimulus or some other policy that generates GDP growth is highly correlated with fiscal stimulus, we might mistakenly attribute some of the impact of the other policy to the fiscal stimulus. But, the basic idea – countries that did more stimulus saw better performance – survives multiple robustness checks.

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