Does Fiscal Stimulus Stimulate?

Abstract

The recession of 2008-2009 - one of the longest and deepest since the Great Depression - has made the effectiveness of fiscal stimulus packages one of the most prominent policy debates in economics today. These packages typically attempt to smooth out business cycle fluctuations through a combination of increased government purchases of goods and services and tax cuts. Unfortunately, the existing empirical evidence on the size of the spending multiplier is limited.

This paper investigates the impact of changes in personal income on consumer’s spending. The result is that the spending multiplier shrunk. This paper shows that consumers are less responsive to an increase in their disposable income and, in turn, it makes the fiscal –stimulus programs less effective and therefore creates slow recovery. This paper can provide a useful benchmark in thinking about the design and effectiveness of fiscal stimulus program.