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Estimating the impact of the financial cycle on fiscal policy

Author

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  • Beau Soederhuizen

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Rutger Teulings

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Rob Luginbuhl

    (CPB Netherlands Bureau for Economic Policy Analysis)

Abstract

We investigate the impact of the financial cycle on fiscal policy by estimating fiscal multipliers for different types of government spending that are contingent on two states determined by the financial cycle. To obtain our estimates, we extend the threshold VAR method from a single country to a panel of high-income countries. Our results indicate that the multiplier for government investment is affected by the state of the financial cycle: while the initial impact is positive for both states, in an upturn it turns negative, while in a downturn it remains positive. In the case of government consumption, the multiplier does not seem to significantly depend on the financial cycle. However, jointly conditioning on the financial and business cycles produces multipliers of government consumption which vary over the states of both cycles. This contrasts with the results for government investment which are left essentially unchanged by the joint conditioning on the four states defined by both cycles.

Suggested Citation

  • Beau Soederhuizen & Rutger Teulings & Rob Luginbuhl, 2023. "Estimating the impact of the financial cycle on fiscal policy," Empirical Economics, Springer, vol. 65(6), pages 2669-2709, December.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:6:d:10.1007_s00181-023-02448-0
    DOI: 10.1007/s00181-023-02448-0
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    More about this item

    Keywords

    Government spending multipliers; Credit markets; Financial cycles; Panel TVAR;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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