Posted by Two years ago, Treasury published in the budget papers an analysis of the impacts of fiscal stimulus. The graph purported to show that there was a positive relationship between the size of stimulus and the subsequent revisions or changes in economic growth forecasts.
Sinclair Davidson did a job on Treasury exposing this analysis as ‘data snooping’. Treasury had left out 8 countries for which comparable data was available from their analysis and when they were included the relationship between stimulus and growth disappeared.
Treasury later responded to the Senate for their error, as David Gruen said:
Professor Davidson is correct. Before publishing the results in the Budget, the regression result for the full sample of 19 countries was checked. Unfortunately … an error was made and the erroneous conclusion was drawn that the results for the restricted sample did not differ, to any material extent, from those for the full sample.
Unsurprisingly, their has been no update from Treasury on the data since.
Now, however, we have enough data to use the latest IMF World Economic Outlook to update the graph with the actual data from 2009 and 2010 (some of the data in Treasury’s analysis used forecasts). There basically remains no relationship between stimulus and growth according to Treasury’s test.
The relationship looks even worse for Keynesians if you include the data for 2011 (some of which remains forecasts for some countries).
(One limitation here is I am using the same data on stimulus that Treasury used, which is only for 2009 and 2010 and is forecasted stimulus not actual.)
ricardian ambivalence 
Does this affect your views on the the efficacy of fiscal policy as a counter-cyclical policy tool?
I note that this is a regression of change in **forecast growth** to fiscal stimulus size. Does this mean that the DSGE models used to generate the forecast are internally inconsistent? Namely, I assume that the models assume that fiscal policy is counter cyclical in some sense. How do you then make sense of the regression suggesting that it isn’t? Perhaps different model configs and assumptions?
I agree with your point Manny. The forecasts were made in April 2009 so actually after many countries had announced stimulus. Presumably the IMF forecasters should have been taking stimulus into account with their forecasts.
I don’t think much of the method but it is what Treasury used. They obviously thought it robust enough to include in budget papers.
wow 2009-10? Just when was the GFC?
Now take a look at counties which has undertaken the classical way.
Estonia, Ireland, Latvia, Spain, etc oh yeah and now the UK.
They have either experienced depressions or recessions.
By the way the stimulus is way down for the US when one takes into account the states and Local governments.
By the way your stimulus figures are problematic.
You are committing an IPA/ Sniclair Davidson error in evaluating a stimulus. 9 One they never acknowledged.)
The main reason why the OZ CAB is still negative is weak tax revenues. Actually this is the case in a lot of countries. This is not a stimulus. A stimulus adds to GDP growth it doesn’t detract from it!
I don’t quite understand your point about tax revenues. In any case, it’s not my analysis. I am just replicating Treasury’s method for testing the impact of the stimulus. I don’t think much of the method for the reasons Manny gave above.
Treasury did this when stimulus was around (however 1/2 of our CAB was lost tax revenues not stimulus) so in some ways it made sense.
It doesn’t now.
To take a great example Ireland’s CAB doubled in 2009 BUT the government detracted 4.6% of GDP!!!
Sorry I don’t follow. The first graph only uses data from 2009 and 2010 when stimulus was definitely still around. The IMF estimated Australia’s discretionary stimulus at 2.9% of GDP in 2009 and 2% in 2010.
Look at the countries and tghen examine the stimilus. It is clearly wrong for the US for example.
The other thing you do not understnd is that of stimulus and impact on the economy.
When do you think the stimulus here and O/S had a negative effect on the economy?
To give you something of a hint you always gradualy withdraw a stimulus as we did so well.
Well I don’t disagree with that. I mentioned that the data on the stimulus was a limitation.
As I have also said, I don’t think this is a very good test of stimulus spending. But Treasury thought it was worthy. I have used the same (updated) data as they did.