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Countercyclical Policy and the Speed of Recovery After Recessions

We consider the effect of some policies intended to shorten recessions and accelerate recoveries. Our innovation is to analyze the duration of the recoveries of various U.S. states, which gives us a cross-section of both state- and national-level policies. Because we study multiple recessions for the same state and multiple states for the same recession, we can control for dif- ferences in the economic conditions preceding recessions and the causes of the recessions when evaluating various policies. We …find that expansionary monetary policy at the national level helps to stimulate the exit of individual states from recession. We fi…nd that exogenous measures of decreases in taxes or targeted increases in federal spending reduce recovery times for state-recessions. We also fi…nd ambient economic conditions can extend expected recovery times: other states in the same region suffering from recession around the same time, the length of the preceding recession, and increases in oil prices.

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