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Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy

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  • Carlo Favero
  • Francesco Giavazzi
  • Jacopo Perego

Abstract

This paper argues that the richer frequency and variety of fiscal policy shocks available in an international sample, which makes the use of this evidence attractive, should be analyzed recognizing the heterogeneity that exists across different countries. The main conclusion of the authors’ empirical analysis is that the question “what is the fiscal policy multiplier” is an ill-posed one. There is no unconditional fiscal policy multiplier. The effect of fiscal policy on output is different depending on the different debt dynamics, the different degree of openness, and the different fiscal reaction functions across different countries. Such differences concern not only the size of the multiplier, but sometimes also its sign. There are many fiscal multipliers and an average fiscal multiplier is of very little use to describe the effect of exogenous shifts in fiscal policy on output.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 59 (2011)
Issue (Month): 4 (November)
Pages: 652-682

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Handle: RePEc:pal:imfecr:v:59:y:2011:i:4:p:652-682

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References

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  1. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
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  9. Sarah Zubairy, 2010. "On Fiscal Multipliers: Estimates from a Medium Scale DSGE Model," Working Papers 10-30, Bank of Canada.
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Citations

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Cited by:
  1. Alexander Chudik & Hashem Pesaran, 2014. "Theory and Practice of GVAR Modeling," Cambridge Working Papers in Economics 1408, Faculty of Economics, University of Cambridge.
  2. Virkola, Tuomo, 2014. "Exchange Rate Regime, Fiscal Foresight and the Effectiveness of Fiscal Policy in a Small Open Economy," ETLA Reports 20, The Research Institute of the Finnish Economy.
  3. Søren Ravn & Morten Spange, 2014. "The Effects of Fiscal Policy in a Small Open Economy with a Fixed Exchange Rate," Open Economies Review, Springer, vol. 25(3), pages 451-476, July.
  4. Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," NBER Working Papers 17240, National Bureau of Economic Research, Inc.
  5. Gabriela Lopes de Castro & Ricardo Mourinho Félix & Paulo Júlio & José R. Maria, 2013. "Fiscal multipliers in a small euro area economy: How big can they get in crisis times?," Working Papers w201311, Banco de Portugal, Economics and Research Department.
  6. Jan Kuckuck & Frank Westermann, 2013. "On the Size of Fiscal Multipliers: A Counterfactual Analysis," Working Papers 96, Institute of Empirical Economic Research.
  7. A. S. Benetrix & P. R. Lane, 2013. "Fiscal Shocks and the Real Exchange Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 6-37, September.
  8. Theofilakou, Nancy & Stournaras, Yannis, 2012. "Government solvency and financial markets: Dynamic panel estimates for the European Monetary Union," Economics Letters, Elsevier, vol. 115(1), pages 130-133.
  9. María Lorena Marí del Cristo & Marta Gómez-Puig, 2013. "“Fiscal sustainability and fiscal shocks in a dollarized and oil-exporting country: Ecuador”," IREA Working Papers 201306, University of Barcelona, Research Institute of Applied Economics, revised Apr 2013.
  10. Javier Andrés & José Boscá & Francisco Ferri, 2012. "Household leverage and fiscal multipliers," Banco de Espa�a Working Papers 1215, Banco de Espa�a.
  11. Manos Matsaganis & Chrysa Leventi, 2014. "Distributive Effects of the Crisis and Austerity in Seven EU Countries," ImPRovE Working Papers 14/04, Herman Deleeck Centre for Social Policy, University of Antwerp.

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