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Why Do Fiscal Multipliers Depend on Fiscal Positions?

Author

Listed:
  • Raju Huidrom

    () (International Monetary Fund)

  • M. Ayhan Kose

    () (World Bank, Development Prospects Group; Brookings Institution; CEPR, and CAMA)

  • Jamus J. Lim

    () (Essec Business School)

  • Franziska L. Ohnsorge

    () (World Bank, Development Prospects Group; CAMA)

Abstract

The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors’ concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. We document empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. We find that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.

Suggested Citation

  • Raju Huidrom & M. Ayhan Kose & Jamus J. Lim & Franziska L. Ohnsorge, 2019. "Why Do Fiscal Multipliers Depend on Fiscal Positions?," Koç University-TUSIAD Economic Research Forum Working Papers 1905, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1905
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    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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