Dynamic Effects of the Chilean Fiscal Policy

In Chile, the empirical literature studying the dynamic effects of fiscal policy and fiscal multipliers, using linear vector autoregression models, disagrees on the effects of government spending and taxes on output. In this paper, we bring new elements to this debate. We include the nonlinear dimension of vector autoregression models to answer if the state, “tight” or “normal”, of the Chilean economy, affects fiscal policy effectiveness. Last, based on the nonlinear framework we question if monetary policy has an influence on the size of fiscal multipliers. We find that: (i) once using the same quarterly data, the size of fiscal multipliers not only varies depending on the identification strategy and the linear vector autoregression model used but also on the definitions of government spending and taxes considered; (ii) the government spending multiplier from the nonlinear framework differs, being about the unit in the “tight” regime and around -0.5 in the “normal” regime; (iii) government spending and tax multipliers in the nonlinear framework are smaller when monetary policy is taken into account, which influences the effectiveness of fiscal policy.