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What Drives Fiscal Multipliers? The Role of Private Wealth and Debt

  • Sebastian Gechert
  • Rafael Mentges

We show that fiscal multiplier estimations may be biased by movements in asset and credit markets, as they facilitate spurious correlations of changes in cyclically adjusted revenues and spending with GDP growth via wrong identifications and an omitted variable bias, thus overstating episodes of expansionary consolidations and downplaying contractionary consolidations. When controlling for asset and credit market movements in otherwise standard approaches to identification, we find multipliers to increase on average by 0.3 to 0.6 units. Consolidations are thus more likely to be contractionary and more harmful to growth than expected by some strands of the existing literature.

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Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 124-2013.

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Length: 38 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:imk:wpaper:124-2013
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