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How Big (Small?) Are Fiscal Multipliers?

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

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 fisscal 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 International Monetary Fund in its series IMF Working Papers with number 11/52.

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Length: 66
Date of creation: 01 Mar 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/52

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Keywords: Developed countries; Developing countries; Exchange rate regimes; External shocks; Government expenditures; Public debt; exchange rate; exchange rates; fiscal policy; fiscal multipliers; government expenditure; flexible exchange rates; government spending; real exchange rate; fiscal stimulus; fiscal multiplier; fixed exchange rates; fiscal stimuli; fiscal shocks; exchange arrangements; flexible exchange rate; effective exchange rate; real effective exchange rate; flexible exchange rate regimes; fiscal expansion; exchange rate regime; fiscal data; government spending shocks; fiscal authorities; fiscal variable; fiscal shock; exchange rate arrangements; current account balance; exchange rate flexibility; tax revenues; revenue collection; fiscal policy trade; budget deficits; fiscal crisis; currency units; fiscal policy on consumption; discretionary fiscal policy; central government expenditure; public spending; foreign capital; tax rates; aggregate demand; fixed exchange rate; fiscal spending; impact of government expenditure; composition of government expenditure; fiscal decision; fiscal tightening; public expenditure; exchange rate index; cyclical fiscal policy; fiscal policies; fiscal events; fiscal profligacy; real exchange rate appreciation;

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  1. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
  2. Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," NBER Working Papers 17240, National Bureau of Economic Research, Inc.
  3. Corsetti, Giancarlo & Meier, André & Müller, Gernot, 2012. "What Determines Government Spending Multipliers?," CEPR Discussion Papers 9010, C.E.P.R. Discussion Papers.
  4. Erceg, Christopher & Lindé, Jesper, 2010. "Is There a Fiscal Free Lunch in a Liquidity Trap?," CEPR Discussion Papers 7624, C.E.P.R. Discussion Papers.
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  20. 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.
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  22. Alan J. Auerbach & Yuriy Gorodnichenko, 2011. "Fiscal Multipliers in Recession and Expansion," NBER Working Papers 17447, National Bureau of Economic Research, Inc.
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  24. 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.
  25. Ilzetzki, Ethan, 2011. "Fiscal policy and debt dynamics in developing countries," Policy Research Working Paper Series 5666, The World Bank.
  26. Emi Nakamura & Jón Steinsson, 2011. "Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions," NBER Working Papers 17391, National Bureau of Economic Research, Inc.
  27. Tommaso Monacelli & Roberto Perotti, 2008. "Fiscal Policy, Wealth Effects, and Markups," NBER Working Papers 14584, National Bureau of Economic Research, Inc.
  28. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  29. Roberto Perotti, 2004. "Public investment: another (different) look," Working Papers 277, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Osborne takes default risk
    by chris dillow in Stumbling and Mumbling on 2010-11-23 11:04:22
  2. 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
  3. 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
  4. Zbunjuju?e o multiplikatoru i Hrvatskoj
    by cronomy in Cronomy on 2013-01-17 07:13:39
  5. Guest Contribution: "Monetary Alchemy, Fiscal Science"
    by Menzie Chinn in Econbrowser on 2013-01-26 09:00:31
  6. Monetary Alchemy, Fiscal Science
    by jfrankel in Jeff Frankels Weblog on 2013-01-26 17:16:19
  7. Fiscal Multipliers – How big or small?
    by Amol Agrawal in Mostly Economics on 2010-11-03 10:32:17
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