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How Big (Small?) are Fiscal Multipliers?

  • Ethan Ilzetzki
  • Enrique G. Mendoza
  • Carlos A. Végh

We contribute to the debate on the macroeconomic effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rates but is zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are smaller than in closed economies; (iv) fiscal multipliers in high-debt countries are negative.

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File URL: http://www.nber.org/papers/w16479.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16479.

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Date of creation: Oct 2010
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Publication status: published as Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
Handle: RePEc:nbr:nberwo:16479
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  13. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2008. "The Effects of Public Spending Shocks on Trade Balances and Budget Deficits in the European Union," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 414-423, 04-05.
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  18. Erceg, Christopher & Lindé, Jesper, 2010. "Is There a Fiscal Free Lunch in a Liquidity Trap?," CEPR Discussion Papers 7624, C.E.P.R. Discussion Papers.
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  27. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
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  29. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
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  31. Kraay, Aart, 2010. "How large is the government spending multiplier ? evidence from World Bank lending," Policy Research Working Paper Series 5500, The World Bank.
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