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We would like to thank Mark De Broeck, Alasdair Scott, and Steven Symansky for helpful comments.
The automatic stabilizers do not necessarily ease in all downturns since the definition of a downturn does not rule out an increase in growth or narrowing of a negative output gap (as long as the output gap is unusually negative).
Unlike much of the VAR literature, the analysis presented here does not evaluate the response of growth to fiscal policy shocks. Rather, the focus is on the response of fiscal policy variables to a growth shock.
Changing the ordering of the fiscal and monetary policy variables in the VAR has no effect on the results, as long as they are ordered after growth and inflation. Including the change in the public debt-to-GDP ratio in the system does not change the qualitative results.
The VAR treats downturns and upturns symmetrically, and therefore impulse responses associated with a positive growth are of the opposite sign and the same magnitude as those reported in the figure. A later section estimates responses separately for downturns and upturns.
This finding is consistent with, for example, Gali and Perotti (2003) and WEO (2003).
The results are robust to changing the ordering of the two halves of growth (downturns and upturns) in the VAR, and to alternative orderings for the fiscal and monetary policy variables.
The analysis updates the estimates of Faust, Rogers, and Wright (2003) that used data ending in 1997, using the OECD Monthly Economic Indicators (MEI). The sample ends in 2004 to ensure that no further data revisions for the most recent data were likely. Revisions are defined as the difference between the data as they stood in the most recent MEI database (June 2008) and the data when they were first published in the MEI.
We are grateful to Romer and Romer for sharing their newly constructed data with us.