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Why do fiscal multipliers depend on fiscal Positions?

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  • Huidrom, Raju
  • Kose, M. Ayhan
  • Lim, Jamus J.
  • Ohnsorge, Franziska L.

Abstract

The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors’ concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. We document empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. We find that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.

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  • Huidrom, Raju & Kose, M. Ayhan & Lim, Jamus J. & Ohnsorge, Franziska L., 2020. "Why do fiscal multipliers depend on fiscal Positions?," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 109-125.
    • Handle: RePEc:eee:moneco:v:114:y:2020:i:c:p:109-125
    DOI: 10.1016/j.jmoneco.2019.03.004
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    More about this item

    Keywords

    Fiscal multipliers; Fiscal position; State-dependency; Ricardian channel; Interest rate channel; Business cycle;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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