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Do fiscal multipliers depend on fiscal positions?

Author

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

Abstract

This paper analyzes the relationship between fiscal multipliers and fiscal positions of governments using an Interactive Panel Vector Auto Regression model and a large dataset of advanced and developing economies. Our methodology permits us to trace the endogenous relationship between fiscal multipliers and fiscal positions while maintaining enough degrees of freedom to draw sharp inferences. We report three major results. First, the fiscal multipliers depend on fiscal positions: the multipliers tend to be larger when fiscal positions are strong (i.e. when government debt and deficits are low) than weak. For instance, the long run multiplier can be as large as unity when fiscal position is strong, while it can be negative when the fiscal position is weak. Second, these effects are separate and distinct from the impact of the business cycle on the fiscal multiplier. Third, the state-dependent effects of the fiscal position on multipliers is attributable to two factors: an interest rate channel through which higher borrowing costs, due to investors'increased perception of credit risks when stimulus is implemented from a weak initial fiscal position, crowd out private investment; and, a Ricardian channel through which households reduce consumption in anticipation of future fiscal adjustments.

Suggested Citation

  • Raju Huidrom & M. Ayhan Kose & Jamus J. Lim & Franziska L. Ohnsorge, 2016. "Do fiscal multipliers depend on fiscal positions?," CAMA Working Papers 2016-35, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2016-35
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2016-06/35_2016_huidrom_kose_lim_ohnsorge.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Konstantin Makrelov & Channing Arndt & Rob Davies & Laurence Harris, 2018. "Fiscal multipliers in South Africa: The importance of financial sector dynamics," WIDER Working Paper Series 006, World Institute for Development Economic Research (UNU-WIDER).
    2. repec:mes:emfitr:v:54:y:2018:i:9:p:1927-1945 is not listed on IDEAS
    3. Raju Huidrom & M. Ayhan Kose & Franziska L. Ohnsorge, 2018. "Challenges of Fiscal Policy in Emerging and Developing Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(9), pages 1927-1945, July.
    4. repec:oup:cesifo:v:63:y:2017:i:3:p:295-316. is not listed on IDEAS
    5. Prayudhi Azwar & Rod Tyers, 2016. "Post-GFC external shocks and Indonesian economic performance," CAMA Working Papers 2016-58, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. International Monetary Fund, 2016. "Portugal; Ex Post Evaluation of Exceptional Access Under the 2011 Extended Arrangement-Press Release; Staff Report; and Authorities Views," IMF Staff Country Reports 16/302, International Monetary Fund.
    7. World Bank, "undated". "South Asia Economic Focus, Fall 2018," World Bank Other Operational Studies 30454, The World Bank.
    8. repec:eee:eecrev:v:95:y:2017:i:c:p:62-83 is not listed on IDEAS

    More about this item

    Keywords

    Fiscal multipliers; fiscal position; state-dependency; Ricardian channel; interest rate channel; business cycle;

    JEL classification:

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

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