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International Comparison
The 2008 crisis reverberated worldwide. In addition to seeing sharp
reductions in output and employment, many countries also experienced
large government budget deficits because of countercyclical fiscal policies
and a fall in tax revenues caused by the recession. These changes in budget
deficits across countries can be used to derive an international estimate of
the impact of fiscal policy. The International Monetary Fund’s (IMF) early
estimates using pre-crisis cross-country data suggested expenditure multipliers
averaging 0.5, although with substantial variation across countries.18
However, subsequent research by IMF (2012) and Blanchard and Leigh
(2013) reassessed this earlier work and estimated multipliers substantially
above 1.0 during the crisis, consistent with the discussion earlier in this
chapter about recent fiscal multipliers in the United States.
This international evidence also suggests that the structural reductions
in government budget deficits (or “fiscal consolidation”) implemented
by many countries has had a large negative impact on economic activity in
the short run, at least when interest rates are low or at the zero lower bound
and when there is already substantial economic slack. Previous research,
summarized in Alesina and Ardagna (2010), hypothesized that fiscal consolidation
can sometimes boost GDP because it increases investors’ confidence
and lowers interest rates. But Blanchard and Leigh’s (2013) results, as well
as findings by Perotti (2011) and Guajardo, Leigh, and Pescatori (forthcoming),
point instead to significant short-run costs of deficit reductions and
suggest a more gradual strategy of fiscal consolidation, as explained for
instance in Blanchard, Dell’Ariccia, and Mauro (2010).
It is notable that the United States is one of only two of the 12 countries
that experienced systemic financial crises in 2007 and 2008 but have
seen real GDP per working-age person return to pre-crisis levels (see Box
3-2). Although this does not provide any specific evidence on the effect of
U.S. fiscal measures, it is consistent with the proposition that the full set of
U.S. policy interventions made a sizable difference in reversing the downward
spiral of falling employment and output.
Benchmarking the Economy’s Performance Since 2009
While the bulk of the available evidence indicates that the Recovery
Act and subsequent fiscal legislation helped avert what might have become a
second Great Depression and paved the way for stronger economic growth,
many households continue to struggle with the after-effects of the recession.
In addition, from a macroeconomic perspective, the average rate of
18 See for example Ilzetzki, Mendoza, and Vegh (2011).
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