Saturday, October 03, 2009


Robert Barro and Charles Redlick wrote an op-ed in WSJ (link) on their original paper (link) where they discuss the macroeconomic effects of fiscal stimulus and construct long-term time-series on U.S macroeconomic data to examine whether real GDP increases follows the spending multipliers and whether reductions in marginal tax rates, rather than spending increases, tend to exert a stronger effect on GDP growth.

"Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12% ... For data that start in 1950, we estimate that a one-percentage-point cut in the average marginal tax rate raises the following year's GDP growth rate by around 0.6% per year. However, this effect is harder to pin down over longer periods that include the world wars and the Great Depression."

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