Fiscal Policy Response to the Great Recession of 2008-2010

Farhad Saboori

Department of Economics and Business

Albright College

Abstract

This paper studies the fiscal policy response in the United States during the financial crisis and the ensuing recession of 2007-2009. The recession has provided an opportunity to revisit the issues surrounding the effectiveness of monetary and fiscal policy in recent years. After reviewing the recent evidence on the effectiveness of fiscal policy, we use a structural vector autoregression (SVAR) model and provide some estimates of the short-run and the long-run tax and spending multipliers in the United States. With the increasing size of the budget deficit and the rising national debt in recent years, the further use of fiscal policy to stimulate the economy has become politically unpopular. In this study we argue that because of the limitations in the use of monetary policy and continuing housing crisis, further use of fiscal policy is justified.

Key Words: Financial crisis, Fiscal policy, Structural Vector Autoregression