Fiscal Policy and Economic Activity During Recessions in Advanced Economies

Hemming, Mahfouz and Schimmelpfennig discuss the effectiveness of fiscal policy in responding to downturns in economic activity. They see this against the background of the contrast between the view that a fiscal expansion is an appropriate policy response to recessions and the experience in Europe during the Nineties which points to the possibility that fiscal contractions can be expansionary. They argue that fiscal multipliers appear to be small in general and that fiscal expansions can be an effective response to a recession only in some instances, such as when there is excess capacity, the economy is a closed one (or an open one with a fixed exchange rate), the government is relatively big and fiscal policy is expenditure-based. Moreover the authors mention the risks involved in the implementation of fiscal policy when there are significant lags or when there are structural impediments on the supply side