Measuring How Fiscal Shocks Affect Durable Spending in Recessions and Expansions

How big are government spending multipliers? A recent litererature has argued that while government spending multipliers may be small on average, they might be much larger during recessions when there is greater economic slack. However, this simple intuition ignores the significant heterogeneity of spending captured in aggregate GDP. Even if aggregate GDP responds more to fiscal shocks during recessions, some subcomponents of GDP may become less responsive during recessions. Such compositional differences in cyclical responsiveness matter even if policy makers care only about aggregate multipliers. This is because the government can control not just the timing of its spending but also its composition. If the government has a fixed amount of spending to allocate, it will be most effective at increasing aggregate demand if it targets that spending towards components of GDP which are particularly responsive during recessions. While it may initially seem counterintuitive that some components of GDP should be less responsive to government spending during periods of slack economic activity, Berger and Vavra (2012) show that theoretical models consistent with household level micro data have exactly this prediction for aggregate durable spending. The basic intuition is straightforward: it is well-known that there are substantial transaction costs that lead consumer durable and housing purchases to be infrequent and lumpy. Berger and Vavra (2012) estimate a household model with fixed costs of durable adjustment to match consumption patterns in the PSID and they find that during recessions, few households adjust their durable holdings. Since fewer households purchase durables, this leads aggregate durable