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How Big (Small?) are Fiscal Multipliers?

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Author Info

  • Ethan Ilzetzki
  • Enrique G. Mendoza
  • Carlos A. Végh

Abstract

We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1016.

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Date of creation: Oct 2010
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Handle: RePEc:cep:cepdps:dp1016

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: government expenditure; macroeconomic policy;

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References

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  1. Mountford, A.W. & Uhlig, H.F.H.V.S., 2002. "What are the Effects of Fiscal Policy Shocks?," Discussion Paper 2002-31, Tilburg University, Center for Economic Research.
  2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  3. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
  4. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  5. Davig, Troy & Leeper, Eric M., 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," CEPR Discussion Papers 7509, C.E.P.R. Discussion Papers.
  6. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
  7. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  8. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2008. "The Effects of Public Spending Shocks on Trade Balances and Budget Deficits in the European Union," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 414-423, 04-05.
  9. Soyoung Kim & Nouriel Roubini, 2004. "Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US," Econometric Society 2004 North American Winter Meetings 271, Econometric Society.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Zbunjuju?e o multiplikatoru i Hrvatskoj
    by cronomy in Cronomy on 2013-01-17 07:13:39
  2. Guest Contribution: "Monetary Alchemy, Fiscal Science"
    by Menzie Chinn in Econbrowser on 2013-01-26 09:00:31
  3. Monetary Alchemy, Fiscal Science
    by jfrankel in Jeff Frankels Weblog on 2013-01-26 17:16:19
  4. Osborne takes default risk
    by chris dillow in Stumbling and Mumbling on 2010-11-23 11:04:22
  5. Monetary or fiscal stimulus can help only if unemployment is cyclical; otherwise, if unemployment is structural expansionary policies will lead only to inflation. Careful recent analyses indicate that unemployment is mainly cyclical in the US
    by Blog Admin in British Politics and Policy at LSE on 2012-10-24 16:00:33
  6. Given the enormity of the short- and long-run fiscal challenges facing the US, the lack of policy detail from both presidential candidates is disappointing
    by Blog Admin in British Politics and Policy at LSE on 2012-10-25 13:00:36
  7. Fiscal Multipliers – How big or small?
    by Amol Agrawal in Mostly Economics on 2010-11-03 10:32:17
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