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Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy

  • Carlo Favero
  • Francesco Giavazzi
  • Jacopo Perego

The aim of this paper is to show how the richer frequency and variety of fiscal policy shocks available in an international sample can be analyzed recognizing the heterogeneity that exists across different countries. The main conclusion of our empirical analysis is that the question “what is the fiscal policy multiplier” is an ill-posed one. There is no unconditional fiscal policy multiplier. The effect of fiscal policy on output is different depending on the different debt dynamics, the different degree of openness and the different fiscal reaction functions in different countries. There are many fiscal multipliers and an average fiscal multiplier is of very little use to describe the effect of exogenous shifts in fiscal policy on output.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 407.

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Date of creation: 2011
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Handle: RePEc:igi:igierp:407
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  1. Ilzetzki, Ethan, 2011. "Fiscal policy and debt dynamics in developing countries," Policy Research Working Paper Series 5666, The World Bank.
  2. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh Gramont, 2011. "How Big (Small?) Are Fiscal Multipliers?," IMF Working Papers 11/52, International Monetary Fund.
  3. Eric Sims & Ruediger Bachmann, 2011. "Confidence and the Transmission of Government Spending Shocks," 2011 Meeting Papers 83, Society for Economic Dynamics.
  4. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the effects of fiscal policy," Working Papers 07-4, Federal Reserve Bank of Boston.
  5. Eric M. Leeper, 2010. "Monetary Science, Fiscal Alchemy," NBER Working Papers 16510, National Bureau of Economic Research, Inc.
  6. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2004. "Exploring the International Linkages of the Euro Area: A Global VAR Analysis," IEPR Working Papers 04.6, Institute of Economic Policy Research (IEPR).
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  8. Gernot Müller & Giancarlo Corsetti & André Meier, 2009. "Fiscal Stimulus with Spending Reversals," IMF Working Papers 09/106, International Monetary Fund.
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  10. Jeffrey R. Brown, 2010. "Tax Policy and the Economy, Volume 24," NBER Books, National Bureau of Economic Research, Inc, number brow09-1, 07.
  11. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2011. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," NBER Working Papers 16782, National Bureau of Economic Research, Inc.
  12. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
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  14. Kilian, Lutz & Vigfusson, Robert J., 2011. "Nonlinearities in the Oil Price-Output Relationship," CEPR Discussion Papers 8174, C.E.P.R. Discussion Papers.
  15. Pesaran, M.H. & Weiner, S.M., 2001. "Modelling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Cambridge Working Papers in Economics 0119, Faculty of Economics, University of Cambridge.
  16. Sarah Zubairy, 2014. "On Fiscal Multipliers: Estimates From A Medium Scale Dsge Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 169-195, 02.
  17. Giancarlo Corsetti & André Meier & Gernot J. Müller, 2012. "Fiscal Stimulus with Spending Reversals," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 878-895, November.
  18. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  19. Alberto Alesina & Silvia Ardagna, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," NBER Chapters, in: Tax Policy and the Economy, Volume 24, pages 35-68 National Bureau of Economic Research, Inc.
  20. Andrea Pescatori & Daniel Leigh & Jaime Guajardo & Pete Devries, 2011. "A New Action-Based Dataset of Fiscal Consolidation," IMF Working Papers 11/128, International Monetary Fund.
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