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Fiscal space and the size of the fiscal multiplier

Author

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  • Luca Metelli

    (Bank of Italy)

  • Kevin Pallara

    (University of Lausanne)

Abstract

This paper investigates the interaction between fiscal policy transmission and fiscal sustainability, captured through the concept of fiscal space. In order to measure the evolution of fiscal space over time we propose four indicators, drawing from different concepts available in the literature. We use these indicators to define periods of ample and tight fiscal space. We then estimate the effects of government spending shocks in the United States according to the level of fiscal space, for the period 1929:Q1-2015:Q4. The main result of the paper is that fiscal multiplier is above one when fiscal space is ample, while it is below one when fiscal space is tight. Moreover, such difference is always significant. This result is very robust across different identification methods and samples.

Suggested Citation

  • Luca Metelli & Kevin Pallara, 2020. "Fiscal space and the size of the fiscal multiplier," Temi di discussione (Economic working papers) 1293, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1293_20
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    More about this item

    Keywords

    Fiscal multipliers; Fiscal space; State-dependency; Local projection; Fiscal sustainability; Government spending;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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