Journal Review: Do Fiscal Multipliers Depend on the State of the Economy? Evidence from 44 Countries

Methodology and Key Findings

Auerbach and Gorodnichenko employ a smooth transition VAR (STVAR) framework, which allows the fiscal multiplier to vary continuously with the state of the economy rather than imposing a binary recession/expansion classification. The state variable is the annual growth rate of real GDP, smoothed using a logistic transition function — an approach that reduces the sensitivity of results to how "recession" is defined. The panel covers annual data from 1960 to 2022, giving the study exceptional statistical power across different fiscal, monetary, and institutional environments.

Three findings stand out. First, the multiplier asymmetry is robust to alternative specifications, country samples, and identification strategies — it is not an artefact of a particular modelling choice. Second, the asymmetry is larger for investment spending than consumption spending, with the recession multiplier for public investment reaching 2.3 in the baseline specification. Third, countries with higher government debt levels have somewhat smaller multipliers even during recessions, consistent with the "Ricardian equivalence" argument that consumers save more when they expect future tax increases.

Why Multipliers Are Larger in Recessions

The economic intuition for state-dependent multipliers draws on two mechanisms. The first is the "accelerator" effect: during recessions, private investment is depressed because firms face demand uncertainty and tighter credit. Public investment can fill this gap, crowding in — rather than crowding out — private activity by providing demand certainty and complementary infrastructure. The second mechanism is monetary accommodation: during downturns, central banks typically hold interest rates low or at their lower bound, which means fiscal expansion does not raise rates and crowd out private borrowing. When rates are already low, the full demand stimulus of government spending flows into output rather than being offset by monetary tightening.

The paper's findings on spending composition align with a growing body of public finance research: transfers to households (e.g. unemployment benefits) have high short-run multipliers because recipients spend a high fraction, but the long-run multiplier falls as the transfers end and no productive capacity has been added. Infrastructure spending, while slower to deploy, creates lasting productive assets that raise potential output — a crucial distinction for policymakers choosing between immediate relief and structural stimulus.