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The Return of Expansionary Austerity: Firms’ Investment Response to Fiscal Adjustments in Emerging Markets

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  • Mr. Nicolas E Magud
  • Samuel Pienknagura

Abstract

We study the response of corporate investment in Emerging Markets to unexpected fiscal shocks. We find that, although firm-level investment decreases on impact following unexpected public expenditure adjustments (classical Keynesian multiplier effect), it quickly rises above pre-shock levels. The rebound in investment is facilitated by fiscal space, flexible exchange rates, and more predictable fiscal policy. We also show that the composition of fiscal adjustments matters for investment’s response—compared to public investment adjustments, reductions in public consumption lead to larger private investment contractions on impact, but drive private investment to above pre-shock levels. Finally, we exploit firm-level heterogeneity in several dimensions, including to show that corporate investment’s recovery is stronger in firms in the tradable sector and in larger and less indebted firms, and to show that the long-run benefits to economic activity of the fiscal shock appear to outweigh its short-run costs.

Suggested Citation

  • Mr. Nicolas E Magud & Samuel Pienknagura, 2022. "The Return of Expansionary Austerity: Firms’ Investment Response to Fiscal Adjustments in Emerging Markets," IMF Working Papers 2022/070, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2022/070
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    Cited by:

    1. Magud, Nicolas E. & Pienknagura, Samuel, 2024. "The return of expansionary austerity: Firms' investment response to fiscal adjustments in emerging markets," Journal of International Money and Finance, Elsevier, vol. 143(C).

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    More about this item

    Keywords

    Fiscal shocks; adjustment; corporate investment; emerging markets; firms' investment response; rebound in investment; government expenditure Forecast Error; firm level; sales growth; Fiscal consolidation; Corporate investment; Capital adequacy requirements; Middle East and Central Asia; Europe; Africa; Global; Asia and Pacific;
    All these keywords.

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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