Can Contractionary Fiscal Policy Be Expansionary?
Jane G. Gravelle and Thomas L. Hungerford, Can Contractionary Fiscal Policy Be Expansionary?:
The results suggest that successful fiscal adjustments (as defined by the cyclical adjustment method) occurred when the economy was at or near potential output, that is, labor and capital resources were fully employed. Unsuccessful fiscal adjustments generally occurred when actual output was below potential output. The U.S. output gap for 2011 is considerably more negative than the average output gap for all unsuccessful fiscal adjustments and even those that began when actual output was below potential output. Almost nine out of ten fiscal adjustments beginning when actual output was below potential output were unsuccessful—fiscal adjustments beginning in a slack economy (such as the current situation in the U.S.) appear to have a low probability of success.
