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What Determines Government Spending Multipliers?

  • Corsetti, Giancarlo
  • Meier, André
  • Müller, Gernot

This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule and trace their macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system. The unconditional responses to a positive spending shock broadly confirm earlier findings. However, conditional responses differ systematically across exchange rate regimes, as real appreciation and external deficits occur mainly under currency pegs. We also find output and consumption multipliers to be unusually high during times of financial crisis.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9010.

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Date of creation: Mar 2012
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Handle: RePEc:cpr:ceprdp:9010
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