Econometric analysis of regime switches and of fiscal multipliers
Debates on the appropriate response of fiscal policy to economic downturns, such as the debates on the merits of austerity measures in Europe, have been centered on the size of the fiscal multipliers. Indeed, empirical and theoretical evidence suggests larger multipliers at times of recession than in expansions,thereby conditioning the success of fiscal consolidation - the higher the multiplier,the more costly the austerity would be in terms of growth of output. We extend the technique of vector autoregressions (VARs) to account for the possibility of time-variant fiscal multipliers for France, Germany, Italy and the United States. We estimate a 3-variable non linear smooth transition vector autoregression, following Auerbach and Gorodnichenko (2012a) Our results suggest that the output multiplier of government purchases is significantly higher in recessions than expansions for the United States.France,and Germany.
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