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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 shows how the richer frequency and variety of fiscal policy shocks available in an international sample can be analyzed recognizing the heterogeneity that exists across different countries. The main conclusion of our 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. 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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17272.

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Date of creation: Aug 2011
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Publication status: published as Carlo Favero & Francesco Giavazzi & Jacopo Perego, 2011. "Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy," IMF Economic Review, Palgrave Macmillan, vol. 59(4), pages 652-682, November.
Handle: RePEc:nbr:nberwo:17272

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  1. Corsetti, Giancarlo & Meier, André & Müller, Gernot, 2009. "Fiscal Stimulus with spending reversals," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7302, C.E.P.R. Discussion Papers.
  2. Dees, S. & di Mauro, F. & Pesaran, M.H. & Smith, L.V., 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0518, Faculty of Economics, University of Cambridge.
  3. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," NBER Working Papers 14028, National Bureau of Economic Research, Inc.
  4. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the Effects of Fiscal Policy," NBER Working Papers 12822, National Bureau of Economic Research, Inc.
  5. Sarah Zubairy, 2014. "On Fiscal Multipliers: Estimates From A Medium Scale Dsge Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 169-195, 02.
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  8. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2011. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," NBER Working Papers 16782, National Bureau of Economic Research, Inc.
  9. Ilzetzki, Ethan, 2011. "Fiscal policy and debt dynamics in developing countries," Policy Research Working Paper Series 5666, The World Bank.
  10. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," CEP Discussion Papers dp1016, Centre for Economic Performance, LSE.
  11. Rüdiger Bachmann & Eric R. Sims, 2011. "Confidence and the Transmission of Government Spending Shocks," NBER Working Papers 17063, National Bureau of Economic Research, Inc.
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  13. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 4(2), pages 1-27, May.
  14. Eric M. Leeper, 2010. "Monetary Science, Fiscal Alchemy," NBER Working Papers 16510, National Bureau of Economic Research, Inc.
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Cited by:
  1. Manos Matsaganis & Chrysa Leventi, 2014. "Distributive Effects of the Crisis and Austerity in Seven EU Countries," ImPRovE Working Papers, Herman Deleeck Centre for Social Policy, University of Antwerp 14/04, Herman Deleeck Centre for Social Policy, University of Antwerp.
  2. Alexander Chudik & M. Hashem Pesaran, 2014. "Theory and Practice of GVAR Modeling," CESifo Working Paper Series 4807, CESifo Group Munich.
  3. Ricardo Félix & Gabriela Castro & José Maria & Paulo Júlio, 2013. "Fiscal Multipliers in a Small Euro Area Economy: How Big Can They Get in Crisis Times?," EcoMod2013 5307, EcoMod.
  4. Theofilakou, Nancy & Stournaras, Yannis, 2012. "Government solvency and financial markets: Dynamic panel estimates for the European Monetary Union," Economics Letters, Elsevier, Elsevier, vol. 115(1), pages 130-133.
  5. Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 703-18, September.
  6. 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, University of Barcelona, Research Institute of Applied Economics 201306, University of Barcelona, Research Institute of Applied Economics, revised Apr 2013.
  7. 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.
  8. A. S. Benetrix & P. R. Lane, 2013. "Fiscal Shocks and the Real Exchange Rate," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 6-37, September.
  9. Javier Andrés & José Emilio Boscá & Javier Ferri, 2011. "Household Leverage and Fiscal Multipliers," Working Papers, International Economics Institute, University of Valencia 1103, International Economics Institute, University of Valencia.
  10. Kuckuck, Jan & Westermann, Frank, 2014. "On the size of fiscal multipliers: A counterfactual analysis," Economics Letters, Elsevier, Elsevier, vol. 123(1), pages 26-32.
  11. Søren Ravn & Morten Spange, 2014. "The Effects of Fiscal Policy in a Small Open Economy with a Fixed Exchange Rate," Open Economies Review, Springer, Springer, vol. 25(3), pages 451-476, July.

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