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Public expenditure multiplier across business cycle phases in an emerging economy: new empirical evidence and dimension

Author

Listed:
  • Paras Sachdeva

    (Indian Institute of Technology Kanpur)

  • Wasim Ahmad

    (Indian Institute of Technology Kanpur)

  • N. R. Bhanumurthy

    (National Institute of Public Finance and Policy
    Bengaluru Dr B. R. Ambedkar School of Economics University)

Abstract

In this paper, we study the transmission and effectiveness of the public expenditure shock across business cycle phases in the Indian economy. The empirical results suggest that the deflationary impact of the public expenditure shock and the subsequent accommodative response of interest rates exhibit a countercyclical public expenditure multiplier during the contraction period. Moreover, the large and significant negative impact of the public expenditure shock on inflation and the interest rate has resulted in a larger public expenditure multiplier during a supply-side recession than a demand-side recession. Based on empirical evidence, we suggest that policymakers consider the presence of nonlinearities in the transmission and effectiveness of the public expenditure shock while taking fiscal policy measures.

Suggested Citation

  • Paras Sachdeva & Wasim Ahmad & N. R. Bhanumurthy, 2024. "Public expenditure multiplier across business cycle phases in an emerging economy: new empirical evidence and dimension," Empirical Economics, Springer, vol. 66(1), pages 279-299, January.
    • Handle: RePEc:spr:empeco:v:66:y:2024:i:1:d:10.1007_s00181-023-02457-z
    DOI: 10.1007/s00181-023-02457-z
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    More about this item

    Keywords

    Indian economy; Countercyclical fiscal multipliers; Business cycle; Fiscal policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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