Do Fiscal Multipliers Depend on Fiscal Positions?

Raju Huidrom (), Ayhan Kose, Jamus Lim and Franziska Ohnsorge

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: This paper analyzes the relationship between fiscal multipliers and fiscal positions of governments using an Interactive Panel Vector Auto Regression model and a large dataset of advanced and developing economies. Our methodology permits us to trace the endogenous relationship between fiscal multipliers and fiscal positions while maintaining enough degrees of freedom to draw sharp inferences. We report three major results. First, the fiscal multipliers depend on fiscal positions: the multipliers tend to be larger when fiscal positions are strong (i.e. when government debt and deficits are low) than weak. For instance, the long run multiplier can be as large as unity when fiscal position is strong, while it can be negative when the fiscal position is weak. Second, these effects are separate and distinct from the impact of the business cycle on the fiscal multiplier. Third, the state-dependent effects of the fiscal position on multipliers is attributable to two factors: an interest rate channel through which higher borrowing costs, due to investors’ increased perception of credit risks when stimulus is implemented from a weak initial fiscal position, crowd out private investment; and, a Ricardian channel through which households reduce consumption in anticipation of future fiscal adjustments.

Keywords: Fiscal multipliers; fiscal position; state-dependency; Ricardian channel; interest rate channel; business cycle (search for similar items in EconPapers)
JEL-codes: E62 H50 H60 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-06
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Related works:
Working Paper: Do Fiscal Multipliers Depend on Fiscal Positions? (2016)
Working Paper: Do fiscal multipliers depend on fiscal positions? (2016)
Working Paper: Do fiscal multipliers depend on fiscal positions ? (2016)
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