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Why Do Fiscal Multipliers Depend on Fiscal Positions?

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Listed:
  • Huidrom,Raju
  • Kose,Ayhan
  • Lim,Jamus Jerome
  • Ohnsorge,Franziska Lieselotte

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. The paper documents empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. It finds that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.

Suggested Citation

  • Huidrom,Raju & Kose,Ayhan & Lim,Jamus Jerome & Ohnsorge,Franziska Lieselotte, 2019. "Why Do Fiscal Multipliers Depend on Fiscal Positions?," Policy Research Working Paper Series 8784, The World Bank.
  • Handle: RePEc:wbk:wbrwps:8784
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    References listed on IDEAS

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    More about this item

    Keywords

    Public Finance Decentralization and Poverty Reduction; Macro-Fiscal Policy; Public Sector Economics; Economic Adjustment and Lending; Macroeconomics and Economic Growth; Economic Policy; Institutions and Governance; Fiscal&Monetary Policy; Macroeconomic Management; Financial Crisis Management&Restructuring;

    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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