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The Size of Fiscal Multipliers and the Stance of Monetary Policy in Developing Economies

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  • Jair N. Ojeda-Joya
  • Oscar E. Guzman

Abstract

In this paper we estimate the effect of government consumption shocks on GDP using a panel of 21 developing economies. Our goal is to better understand the reasons for the low fiscal multipliers found in the literature by performing estimations for alternative exchange rate regimes, business-cycle phases, and monetary policy stances. In addition, we perform counterfactual simulations to analyze the possible gains from fiscal-monetary policy coordination. The results imply that government consumption shocks are usually followed by monetary policy tightening in developing economies with flexible regimes. Our simulations show that this reaction partially explains the presence of low fiscal multipliers in these economies. On the other hand, we find that government consumption shocks imply higher multipliers in developing economies during fixed regimes, economic booms or monetary expansions. In particular, implementing fiscal programs during monetary expansions seems to improve significantly their economic stimulus.

Suggested Citation

  • Jair N. Ojeda-Joya & Oscar E. Guzman, 2017. "The Size of Fiscal Multipliers and the Stance of Monetary Policy in Developing Economies," IEER Working Papers 106, Institute of Empirical Economic Research, Osnabrueck University.
    • Handle: RePEc:iee:wpaper:wp0106
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    2. Syed Sadaqat Ali Shah & Muhammad Asim Afridi, 2023. "Cyclical variation of fiscal multipliers in Caucasus and Central Asia economies: an empirical evidence," Economic Change and Restructuring, Springer, vol. 56(6), pages 4531-4563, December.

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    More about this item

    Keywords

    Fiscal Policy; Monetary Policy; Structural Vector Autoregression; Exchange Rate Regime; Panel VAR;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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