Nonlinear effects of the Chilean fiscal policy

In Chile, the empirical literature studying the 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 a new element to this debate. We study if the state of the Chilean economy, “tight” or “normal” regime, affect fiscal policy effectiveness. We find that, in the long-term, the government spending multiplier is above the unit in the “tight” regime and around -0.5 in the “normal” regime. Moreover, the tax multiplier is about null in both regimes, suggesting that government spending helps to boost the economy in periods of low economic growth. Also, we study the role of the monetary policy interest rate on the size of fiscal multipliers, finding slightly smaller government spending multipliers.