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Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy

Author

Listed:
  • Carlo Favero
  • Francesco Giavazzi
  • Jacopo Perego

Abstract

This paper argues that the richer frequency and variety of fiscal policy shocks available in an international sample, which makes the use of this evidence attractive, should be analyzed recognizing the heterogeneity that exists across different countries. The main conclusion of the authors’ 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. Such differences concern not only the size of the multiplier, but sometimes also its sign. 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.

Suggested Citation

  • Carlo Favero & Francesco Giavazzi & Jacopo Perego, 2011. "Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 652-682, November.
  • Handle: RePEc:pal:imfecr:v:59:y:2011:i:4:p:652-682
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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