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The input side one is most critical, it is needed to maintain stability of the internal error amplifier. Always follow the manufacturer's data sheet but in general you need at least 1uF and a preferably a capacitor better suited to high frequencies in parallel to it such a 100nF ceramic. They should be as close to the 7805 as is practical. The output capacitor is recommended but generally doesn't need to be very large. In fact if you use very large values it can cause other problems such as over-current limiting as they initially charge and slower transient response.
For general applications, the values indicated in the data sheet is good, but for applications where low noise is required, other things come into play in selecting the output capacitor.
Your typical three terminal regulator has an inductive output reactance and varies with load current. The output inductance typically varies from 10 uH at light load, down to 1 uH at full load of 1 Amp. So any output capacitor will interact with this inductance to produce noise peaks at some frequency as shown in a National Semiconductor document.
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