An Empirical Analysis of the Revival of Fiscal Activism in the 2000s

E agree about the goals of price stability, low unemployment and stable economic growth, but they disagree about the policies to achieve these goals. The disagreement is particularly heated over discretionary countercyclical Keynesian fiscal policy. After the poor macroeconomic performance of the 1970s and critical policy evaluations of the Keynesian approach— ranging from Robert E. Lucas and Thomas J. Sargent’s (1978) “After Keynesian Macroeconomics” to Edward M. Gramlich’s (1978, 1979) empirical assessments— discretionary countercyclical policy fell out of favor for more than two decades, only to return again in the past decade.1 Regardless of one’s views about the rationale for the recent revival,2 it provides another opportunity to assess discretionary countercyclical fiscal policy. The purpose of this paper is to contribute to such an assessment by reviewing the impact of the stimulus packages enacted in the past decade.