Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy
Carlo A. Favero
Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)
Bocconi University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. DP8517
This paper shows how the richer frequency and variety of fiscal policy shocks available in an international sample can be analyzed recognizing the heterogeneity that exists across different countries. The main conclusion of our empirical analysis is that the question 'what is the fiscal policy multiplier' is an ill-posed one. There is no unconditional fiscal policy multiplier. The effect of fiscal policy on output is different depending on the different debt dynamics, the different degree of openness and the different fiscal reaction functions across different countries. There are many fiscal multipliers and an average fiscal multiplier is of very little use to describe the effect of exogenous shifts in fiscal policy on output.
Number of Pages in PDF File: 38
Keywords: fiscal policy, global VAR models, government budget constraint, public debt
JEL Classification: E62, H60
Date posted: August 12, 2011
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