Do Fiscal Multipliers Depend on Fiscal Positions?

40 Pages Posted: 27 Jun 2016

See all articles by Raju Huidrom

Raju Huidrom

World Bank

M. Ayhan Kose

Development Prospects Group at the World Bank

Jamus Jerome Lim

World Bank

Franziska Ohnsorge

World Bank

Multiple version iconThere are 3 versions of this paper

Date Written: June 2016

Abstract

This paper analyzes the relationship between fiscal multipliers and fiscal positions of governments using an Interactive Panel Vector Auto Regression model and a large dataset of advanced and developing economies. Our methodology permits us to trace the endogenous relationship between fiscal multipliers and fiscal positions while maintaining enough degrees of freedom to draw sharp inferences. We report three major results. First, the fiscal multipliers depend on fiscal positions: the multipliers tend to be larger when fiscal positions are strong (i.e. when government debt and deficits are low) than weak. For instance, the long run multiplier can be as large as unity when fiscal position is strong, while it can be negative when the fiscal position is weak. Second, these effects are separate and distinct from the impact of the business cycle on the fiscal multiplier. Third, the state-dependent effects of the fiscal position on multipliers is attributable to two factors: an interest rate channel through which higher borrowing costs, due to investors' increased perception of credit risks when stimulus is implemented from a weak initial fiscal position, crowd out private investment; and, a Ricardian channel through which households reduce consumption in anticipation of future fiscal adjustments.

Keywords: Fiscal multipliers; Fiscal position; State-dependency; Ricardian channel; Interest rate channel; Business cycle

JEL Classification: E62, H50, H60

Suggested Citation

Huidrom, Raju and Kose, M. Ayhan and Lim, Jamus Jerome and Ohnsorge, Franziska, Do Fiscal Multipliers Depend on Fiscal Positions? (June 2016). CEPR Discussion Paper No. DP11346. Available at SSRN: https://ssrn.com/abstract=2801007

Raju Huidrom (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

M. Ayhan Kose

Development Prospects Group at the World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Jamus Jerome Lim

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Franziska Ohnsorge

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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