Discussion of “Fiscal Multipliers in Recession and Expansion” by

Auerbach and Gorodnichenko provide impressive evidence about what happens in a panel of advanced economies when government purchases rise or fall. They find that changes in purchases in a weak economy have large effects in the same direction on output and employment. Their point estimate is that one added dollar of government purchases results in about $3.50 of added GDP when the economy is weak, with a 90-percent confidence interval running from 0.6 to 6.3. By contrast, in times of a strong economy, added government purchases reduce GDP, according to the point estimate. The confidence interval for that finding includes moderate positive values. A&G identify weak and strong economies in two ways. One is the 18-month change in the departure of an activity measure (real GDP, unemployment, and others) from its slow-moving trend. The second is the departure from trend itself. They think of these as rate-of-change and level measures, respectively. They measure the trend using the HodrickPrescott filter with a smoothing parameter of 10,000, well above the amount of smoothing conventionally used for semiannual data. That said, it turns out that they remove quite a bit of the cyclical movement of the activity variables. Figure 1 shows semiannual data for U.S. unemployment over the period 1960 through 2011, along with its HP trend. According to the figure, unemployment only barely exceeded trend following the 2001 recession. More significantly, most of the high level of unemployment in late 2011 was the result of a high trend value. The signal from the variable that A&G use is that the slump following the