State dependence of fiscal multipliers: the source of fluctuations matters

• A novel theory of state-dependent spending and taxation multipliers under goods market search. Spending high in demand-driven recessions low supply-driven downturns. Tax cut Austerity can be the policy with largest multiplier if labour elasticities are sufficiently low. Empirical evidence that state-dependent, conditional on source fluctuations. We develop a general fiscal framework featuring two empirically relevant frictions: idle capacity unsatisfied demand. Our key finding is fluctuations determines cyclicality multipliers. Policies stimulate demand, such as government spending, have large recessions, but small possibly negative Conversely, policies boost supply, cuts payroll taxes, ineffective powerful downturn supply-driven. Austerity, implemented by reduction consumption, supply-side booms, provided labor demand supply obtain model-free empirical support for our predictions developing econometric specification allows to estimate tax expansions, those being either demand- or