Journal of Monetary Economics Best Paper Award 2023

We are delighted to report that The Journal of Monetary Economics has awarded the 2023 Best Paper Award to Associate Professor Francesco Zanetti and former doctoral student (and Edgeworth Prize winner) Mishel Ghassibe for their paper "State dependence of fiscal multipliers: the source of fluctuations matters" (Journal of Monetary Economics, 132, November 2022, 1-23).

The prize  given to a paper for its originality and contributions to the field  is one of the top recognitions a macroeconomist can receive in the profession, and is testament to the great research environment we have developed in the Department. Eligible papers are published in the Journal in the previous two years, and the winning paper is selected by the journal Editors.

Francesco reacted to the news:

Mishel and I are delighted to receive the award. It is a testament on the conducive research environment in Oxford, where ideas conceived in the classroom often create synergies between students and faculty that lead to important contributions to the field. We are immensely grateful to the department and colleagues for the support.

Head of Department Hamish Low commented:

"Many congratulations to Mishel and Francesco  well deserved for an insightful and interesting paper. I am particularly pleased for Mishel to have won this award for a chapter of his PhD thesis. It is great to see students and faculty working together so effectively."

Read the full paper here


Here is a summary of the winning paper:

Francesco and Mishel develop a novel framework to study the effect of fiscal policy, which shows that the effectiveness of a fiscal intervention aimed to combat a downturn depends on the nature of the macroeconomic shock. The articles develops a general theory of state-dependent fiscal multipliers, and obtains model-free empirical support for the predictions.

The key innovation of the theoretical model is the link of fiscal interventions --implemented by either government spending or tax cut-- to the relationship between the demand and supply of goods. Fiscal policy achieves the maximum stimulus when equates demand to supply since an excess in demand increases prices and discourages private consumption, while an excess in supply leaves unused resources in the economy. The article shows that government spending is effective if the recession originates from the lack of demand since the government intervention helps to increase demand and bring it at a level closer to the supply, but it is ineffective if the recession originates from a negative shock to the supply of goods since an increase in spending will lead to high prices when supply is low, which depresses private consumption.  Tax cuts instead are powerful to stimulate the economy in response to an adverse shock to the supply of goods since lower taxes stimulate production and help the supply of goods to increase to satisfy the demand, but they are ineffective if the recession results from lack of demand since the expansion in production for the reduction in taxes will increase the production of goods that are not in demand and remain unsold.

The article develops an new empirical model that shows sizeable differences in the fiscal multipliers over the business cycle in US data. In a two-year horizon, the spending multiplier in demand-driven recessions is equal to 0.86, larger than the multiplier of 0.32 in supply-driven recessions. The tax cut multiplier is approximately zero in demand-driven recessions, whereas in supply-side recessions it is equal to 4.29, but with a large margin of uncertainty.

The article provides a useful framework to study and empirically quantify the effect of fiscal interventions, and it opens new ways to think about economic policies.