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How big (small?) are fiscal multipliers?

Author

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

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.

Suggested Citation

  • Ilzetzki, Ethan Oriel & Mendoza, Enrique G. & Végh, Carlos A., 2010. "How big (small?) are fiscal multipliers?," LSE Research Online Documents on Economics 121725, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:121725
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    References listed on IDEAS

    as
    1. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 1-50.
    2. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    3. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    4. Kelejian, Harry H, 1974. "Random Parameters in a Simultaneous Equation Framework: Identification and Estimation," Econometrica, Econometric Society, vol. 42(3), pages 517-527, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    government expenditure; macroeconomic policy;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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